How the comparison works
Comparing a rent check with a mortgage payment misses most of the picture. Part of each mortgage payment builds equity; owning has costs a renter never pays; and a renter keeps the down payment to invest. So the calculator compares net worth, month by month:
- Buying: the home's value (growing at the rate you set), less the cost of selling it and the loan still owed.
- Renting: the down payment and buying costs, invested instead, at the return you set.
Both sides spend the same each month. When owning costs more than rent, the renter invests the difference; when rent costs more, the buyer does. Owning costs are the mortgage payment (principal, interest and any PMI, from the same schedule as the mortgage calculator), plus property tax and upkeep as a share of the home's value, plus insurance and HOA dues, which rise with inflation. Rent rises at its own rate.
An example
A $400,000 home with $80,000 down at 6.5% over 30 years, against $2,200 a month in rent. It assumes 3% buying costs, 6% selling costs, 1.1% property tax, 1% upkeep, $1,800 a year of insurance, and home values, rents and costs all rising 3% a year, with savings earning 5%. Owning costs $2,872.62 in the first month against $2,200 of rent, so the renter starts out investing about $670 a month, plus the $92,000 kept back at the start.
- After 10 years, buying comes out about $8,000 ahead. It pulls ahead in year 9, once enough of the loan is repaid and the home has grown in value.
- After 5 years, renting is about $21,300 ahead: selling costs and the mostly-interest early payments haven't been made up yet.
- Change one assumption and the 10-year answer flips. If homes gain 1% a year instead of 3%, renting is about $72,100 ahead. If investments earn 7% instead of 5%, renting is about $32,500 ahead. If rent is $1,800 instead of $2,200, renting is about $61,900 ahead.
In this example, a short stay favors renting because buying and selling are expensive. Over longer stays the answer depends on how fast homes gain value compared with what your money would earn elsewhere, and nobody knows either one in advance.
What drives the answer
- How long you stay. Buying and selling costs are paid once, so a short stay has less time to make them up.
- Price compared with rent. Where homes cost many times a year's rent, renting and investing the difference has more room to win.
- Home value growth against investment returns. The buyer's wealth grows with the home; the renter's with their investments. Try different rates for each.
- The rate. A higher mortgage rate raises owning costs, so the renter has more to invest.
- Upkeep and surprises. Roofs, water heaters and repairs are real costs. The upkeep rate spreads them out evenly; in practice they come in lumps.
What it leaves out
It's a model, not a forecast. The buyer's mortgage-interest and property-tax deduction is left out unless you choose a filing status under “Tax deduction (estimate)”. For a single filer in the 22% bracket it's worth about $18,400 over the 10 years in the example, and buying then comes out about $31,800 ahead, pulling ahead in year 7. For a married couple filing jointly it's worth nothing here, since their standard deduction is bigger. Tax on the renter's investment gains and on a home sale isn't modelled. It assumes the renter really invests the difference every month; if that money would be spent instead, buying's forced saving counts for more. And it can't price what isn't money: stability, freedom to move, and control over the place you live.
Common questions
What's a reasonable rate for home values or investments?
There's no reliable forecast for either, and past averages vary by place and period. Rather than trusting one number, try a cautious, a middle and a hopeful value for each, and see whether the answer changes.
Why does buying look worse over just a few years?
Buying costs, selling costs and the interest-heavy early payments come first; equity and appreciation take time to overtake them. The chart shows the point where buying's line crosses renting's.
Should I count the down payment as a cost?
No, and the calculator doesn't. It becomes equity in the home. What it costs is what the money could have earned elsewhere, which is why the renter invests it.
What about PMI with a small down payment?
With less than 20% down, PMI is added to the payment until it ends by law, as in the mortgage calculator. A small down payment also means little equity at first: with 3% down, selling costs alone can make the buyer's net worth negative for a while, which the chart shows.
Can I see how much house I can afford first?
Yes. The affordability calculator finds the highest price your income and debts allow; then compare renting with buying at that price here.