"Rent is throwing money away" is one of the most repeated lines in personal finance, and one of the most misleading. Owners have unrecoverable costs too, and money that isn't tied up in a house can grow elsewhere. Here's how to compare the two fairly and figure out which is better for you.
Key Takeaways
A fair comparison counts every cost of owning and assumes the renter invests the down payment and any monthly savings.
In our example, buying a $400,000 home instead of renting at $2,200 a month takes 11 years to come out ahead.
How long you stay matters most, because buying and selling costs are paid up front and at the end.
Rent level, home price growth, mortgage rates and investment returns can each swing the break-even point by years.
Why comparing rent to a mortgage payment doesn't work
A mortgage payment is only part of what owning costs. On top of principal and interest, owners pay:
Property tax, often around 1% of the home's value a year
Homeowners insurance
Maintenance and repairs, commonly estimated at 1% to 2% of the home's value a year
HOA dues, for many condos and newer neighborhoods
Closing costs of roughly 2% to 5% of the price when buying
Selling costs of around 5% to 6% when you move, mostly agent commissions
Meanwhile, the renter keeps the down payment and closing costs, which could be invested. Compare only rent and the mortgage payment and you miss all of this.
The buyer pays the down payment and closing costs up front, then the mortgage plus all ownership costs.
The renter invests what the buyer spent up front, pays rent, and invests the difference whenever renting costs less than owning that month.
If owning becomes the cheaper option (rent keeps rising while a fixed mortgage payment doesn't), the buyer invests the difference instead.
At any point, the buyer's net worth is what they'd walk away with if they sold (home value minus selling costs and the remaining loan, plus investments). The renter's net worth is their portfolio.
An example: a $400,000 home vs. $2,200 rent
Assume a $400,000 home with 20% down, a 30-year mortgage at 6.5%, property tax of 1.1%, $1,800 a year for insurance, maintenance of 1% a year, closing costs of 3% and selling costs of 6%. The alternative is renting a similar home for $2,200 a month. Rent and home values both grow 3.5% a year, and invested money earns 7%.
In the first month, owning costs about $2,873, of which $2,023 is principal and interest, compared with $2,200 of rent. Here's how the two households compare over time:
Years
Net worth if you buy
Net worth if you rent
Difference
3
$108,343
$138,209
Renting ahead by $29,867
5
$147,015
$171,450
Renting ahead by $24,435
7
$189,045
$206,757
Renting ahead by $17,712
10
$259,102
$263,817
Renting ahead by $4,715
15
$400,445
$373,424
Buying ahead by $27,021
20
$600,014
$523,747
Buying ahead by $76,267
30
$1,291,941
$1,030,289
Buying ahead by $261,652
Buying pulls ahead in year 11 and keeps widening its lead after that, as rent keeps climbing while the mortgage payment stays fixed and then ends after 30 years.
What changes the answer
Starting from that example, here's how changing one assumption at a time moves the break-even year and the 10-year result:
Change
Buying breaks even
After 10 years
Base case
Year 11
Renting ahead by $4,715
Rent is $1,800 instead of $2,200
Not within 30 years
Renting ahead by $83,462
Rent is $2,600
Year 5
Buying ahead by $74,031
Home prices grow 2% a year
Year 25
Renting ahead by $65,670
Home prices grow 5% a year
Year 5
Buying ahead by $65,363
Mortgage rate is 5.5%
Year 6
Buying ahead by $37,621
Investments earn 5% a year
Year 7
Buying ahead by $35,742
A few lessons stand out:
How long you'll stay matters most. Buying and selling costs are paid up front and at the end, and it takes time for price growth and principal payments to make them back. If you might move within a few years, renting usually wins.
Rent relative to price matters a lot. A quick check is the price-to-rent ratio: the home price divided by a year's rent for a similar place. Here it's $400,000 ÷ $26,400, or about 15. The higher the ratio, the better renting tends to look.
Home price growth is the biggest unknown. The difference between 2% and 5% a year moves break-even by 20 years. Be cautious about assuming recent price gains will continue.
Rates matter. A point lower on the mortgage cuts the break-even from 11 years to 6 in this example.
What the numbers leave out
Taxes. The mortgage interest deduction helps only if you itemize, and most homeowners take the standard deduction instead. Tax on investment gains and the home-sale capital gains exclusion also aren't modeled.
Discipline. The comparison assumes the renter actually invests the difference. A mortgage works as forced savings; if the extra money would otherwise be spent, buying looks better in practice than on paper.
Life. Stability, schools, the freedom to renovate, and not having a landlord all have value. So do flexibility and not being responsible for a broken water heater.
How to decide
Estimate how long you'll realistically stay. If it's under five years, lean toward renting unless your market's numbers are unusually favorable.
Run your own numbers in the rent vs. buy calculator with local rent, prices and property tax, and try a pessimistic home price growth rate.
All example figures were calculated with the EveryFinance rent vs. buy calculator using the assumptions stated above.
Frequently asked questions
Is it better to rent or buy?
It depends mainly on how long you'll stay, how rent compares to home prices where you live, and your mortgage rate. Buying usually needs several years to recover the costs of buying and selling; if you might move within a few years, renting is often the better financial choice.
How long do you need to stay in a home for buying to make sense?
A common rule of thumb is at least five years, but the real answer depends on your market. In our example with a $400,000 home and $2,200 rent, buying took 11 years to break even; with rent at $2,600 it took 5.
Is rent just throwing money away?
No. Rent buys housing, just as mortgage interest, property tax, insurance and maintenance do for an owner. Those unrecoverable costs of owning can be similar to or higher than rent, especially early in a mortgage when most of each payment is interest.
