Rent vs Buy: How to Compare the True Costs

Whether to rent or buy is one of the biggest money decisions most people make, and the usual advice ("renting is throwing money away" or "buying is a trap") is too simple to be useful. The honest answer is that it depends on how long you will stay, what the home costs to own, how fast prices rise, and what you could earn on the money you do not spend on a down payment. This guide builds a simple model so you can see which of these matters most.

The costs of owning that people forget

A mortgage payment is only part of the cost of a home. On a $400,000 home with 20% down at 6.5%, the loan payment is $2,022.62 a month. Property tax, insurance and maintenance add to that, so the true monthly cost is closer to $3,147.62 in the first year.

On top of that, buying has one-off costs: closing costs when you buy, and agent fees and closing costs when you sell, which are often 6% to 8% of the sale price in total. Renting has its own cost: rent usually rises over time.

The model

To compare fairly, imagine two people who start with the same cash. Both want the same home or one that rents for $2,400 a month.

• The buyer pays a 20% down payment ($80,000) and 2% closing costs on a $400,000 home, takes a 30-year loan at 6.5%, and pays tax (1.5% of value), insurance ($1,500 a year) and maintenance (1.5% a year). The home rises 3% a year, and selling costs are 7%.
• The renter pays $2,400 a month, rising 3% a year, and invests the down payment and closing costs, plus every month's saving if renting is cheaper than owning, at 5% a year.

Each year we compare net worth: the buyer's equity after selling costs, against the renter's investments.

View the numbers behind the first chart

Year	Buy: net worth	Rent: net worth	Ahead
1	$66,737	$101,682	Rent by $34,945
3	$97,959	$129,735	Rent by $31,776
5	$131,695	$158,688	Rent by $26,993
7	$168,181	$188,512	Rent by $20,330
10	$228,653	$234,786	Rent by $6,132
15	$347,375	$315,496	Buy by $31,878
20	$493,744	$399,427	Buy by $94,317
30	$902,942	$566,957	Buy by $335,985

You can try your own numbers in our Rent vs. Buy Calculator. It uses a cost-based method rather than this net-worth comparison, so the figures will not match exactly, but the same inputs drive both.

What moves the break-even point

Two assumptions change the result more than anything else. The first is home price growth. If prices barely rise, equity builds only by paying down the loan, and buying takes much longer to win.

The second is the return on invested savings. If the renter can earn more on the money, renting stays attractive longer.

Other things the numbers do not show

• Taxes. The mortgage interest and property tax deductions only help if you itemise, and the standard deduction is high enough that many owners do not.
• Stability and control. Owning protects you from rent rises and lets you renovate. Renting gives flexibility to move for a job.
• Risk. A home is a large, single, hard-to-sell asset, and repairs can be sudden and expensive.
• Discipline. A mortgage forces saving. A renter only gets the investment result if they actually invest the difference.

A simple way to decide

• If you expect to stay less than about 5 years, renting is usually cheaper in cost terms.
• If you plan to stay for a decade or more and prices in your area are rising at a healthy pace, buying is more likely to come out ahead. With the costs in this example the break-even is 12 years, and it falls quickly when prices grow faster.
• Check that the full monthly cost of owning, not just the mortgage, fits comfortably in your budget. The how much house can you afford guide shows how.

Common questions

Sources and further reading

• Consumer Financial Protection Bureau: Buying a house
• CFPB: What is an escrow account?

This guide is for general education and is not financial advice. The results come from a simplified model with the assumptions stated, and ignore taxes and other factors. Local prices, rents and your situation can change the answer.