Why rent vs. mortgage payment is the wrong comparison
A mortgage payment and a rent check are not the same kind of money. Part of a mortgage payment is principal, which builds your equity in the home; you get it back when you sell, less selling costs and anything the home has lost in value. Meanwhile, owning carries costs that never show up in the mortgage payment at all.
A fairer comparison sets the costs you never get back on each side against each other, then adds what each path leaves you with after a number of years.
Costs you never get back
Renting: the rent itself and renters insurance.
Owning:
- Mortgage interest, which makes up much of the principal-and-interest payment in the early years of a loan, especially at higher rates.
- Property taxes, homeowners insurance and any HOA dues.
- Maintenance and repairs. These vary widely by the age and condition of the home, and they are easy to underestimate.
- Private mortgage insurance, if you put down less than 20% on a conventional loan.
- Closing costs when you buy, and selling costs, such as agent commissions, when you sell.
- The return the down payment and closing costs would have earned if you had invested them instead.
Principal is not on this list. It is savings held in the home.
Why how long you stay matters most
Buying has large one-time costs at both ends: closing costs going in, and selling costs coming out. You pay them once whether you stay two years or twenty, so the longer you stay, the more years they are spread over. Equity from principal payments and any rise in value also builds with time.
That is why renting often comes out ahead over short stays and buying over long ones. Where the crossover falls depends on prices, rents, rates and costs where you live, so it is worth working out for your own numbers rather than relying on a rule of thumb.
Assumptions that swing the answer
- Home price growth. Homes do not always rise in value, and they can fall. Try a low or zero appreciation rate as well as a hopeful one.
- Rent increases. Rent usually rises over time, while a fixed-rate mortgage payment does not, though taxes and insurance can still rise.
- Investment return. The renter's advantage depends on actually investing the down payment, and any monthly savings, rather than spending them.
- Ongoing costs. Taxes, insurance and repairs tend to rise over time too. The calculator holds them flat unless you switch on its option to raise them 2% a year.
Some of what matters is not in the numbers: the flexibility to move easily as a renter, and the control and stability of owning. Weigh those after you know what the money says.
Running the numbers
The Rent vs. Own Calculator takes your rent, expected rent increases and renters insurance; the home price, down payment, rate, loan term and closing costs; property taxes, insurance, HOA dues, repairs and PMI; and the appreciation rate, investment return and how long you plan to stay. It assumes the renter invests what the buyer put into the down payment and closing costs, and that whichever side spends less each month invests the difference. It shows net wealth for each path over time, the break-even year when buying pulls ahead, and the owner's net wealth after an allowance for selling costs. It also assumes mortgage interest and property taxes are deducted at a 24% tax rate, as if you itemize, which may not match your situation. The break-even year is found only within the stay you enter, so set a long enough stay to see it. The calculator's figures are estimates; a lender's quote and your own costs are the ones to decide on.