Using all of your numbers (assuming you calculate to year 32 where both houses are paid off & using property tax rate of 1.09%), I get:
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$600k @ 5.5% w/ 20% down:
Total interest = $501139.39
Total tax = $287917.96 (32 years of taxes @ 1.2% increase due to prop 13)
Total interest + tax – 37% deduction (28% fed and 9% state) = ($501139.39 + $287917.96)*.63 = $497106.13
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$500k @ 7.238% w/ 20% down:
Total interest = $581162.06
Total tax = $220041.26 (30 years of taxes @ 1.2% increase due to prop 13)
Total interest + tax – 37% deduction (28% fed and 9% state) = ($581162.06 + $220041.26)*.63 = $504,758.09
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Based on those two total numbers, and adding in the rent & down payment differences, you get:
$504758.09 + $60000 – $20000 = $544758.09 – $497106.13 = $47651.96

So, I get $47651.96 cheaper for the person who bought it at $600k.

I’m not sure if you consider selling the house after 32 years or not, but if this person does sell after 32 years, then I have to take into consideration $100k price difference. Then, the person who bought @ $500k would be the one w/ the better deal @ $52348.04 advantage. Assuming that the house price being sold is low enough that both buyer can sell w/out incurring any capital gain.

Why is there such a big discrepancy between your # and my #? Am I doing something wrong or missing something that you considered?