The Comparison Most People Get Wrong
Comparing a $2,200 rent against a $2,066 mortgage payment is the wrong comparison. It omits everything that makes ownership expensive and everything that makes it worthwhile. A fair calculation counts, on the buying side, property tax, insurance, maintenance, and the round-trip transaction cost of about 8% of the price; and on the renting side, the return that the down payment and closing costs would have earned had they stayed invested.
Opportunity Cost Is Real Money
An $80,000 down payment plus $8,000 of buying costs is $88,000 removed from an investment account. At 6% a year that money would become $158,000 over ten years. Any honest comparison charges the buyer for that forgone $70,000 — it is the single largest item people leave out.
The renter's side has a symmetric requirement: whenever ownership costs more per month than rent, the renter must actually invest the difference. If it is spent instead, renting loses in reality even where it wins on the spreadsheet.
The 5% Rule, and Why It Understates Today
A well-known shortcut: multiply the home price by 5% and divide by 12 to approximate the unrecoverable annual cost of owning — roughly 1% property tax, 1% maintenance, and 3% cost of capital. If rent falls below that figure, renting is likely cheaper.
The 3% cost-of-capital term is the weak point. It was written for an era of 3–4% mortgages. At 6.7%, the same calculation lands closer to 6.5–7%:
| Component | Rate era of 3.5% | Rate era of 6.7% |
|---|---|---|
| Property tax | 1.0% | 1.1% |
| Maintenance and insurance | 1.0% | 1.5% |
| Cost of capital, net of appreciation | 3.0% | 3.6% |
| Transaction costs spread over 10 years | 0.8% | 0.8% |
| Unrecoverable cost | 5.8% | 7.0% |
On a $400,000 home that is $2,333 a month, not $1,667. Rent of $2,200 now sits below the break-even line, and the calculator's default scenario accordingly favours renting over ten years. The rule is a useful sanity check, but the capital cost has to reflect the rate you are actually being offered.
Time Is the Deciding Variable
Buying carries a large up-front loss: roughly 8% of the price disappears into agent commission, title, transfer taxes and closing fees across a purchase and a sale. Appreciation and principal repayment claw that back slowly, which produces a break-even horizon rather than a verdict:
| Years in the home | Typical outcome |
|---|---|
| Under 3 | Renting wins almost regardless of the market — transaction costs dominate. |
| 3 to 7 | Decided by the rent-to-price ratio and the mortgage rate. At 6–7% rates, renting frequently still wins here. |
| 7 to 12 | The crossover for most U.S. markets. Principal repayment and flat housing costs start to compound in the owner's favour. |
| Over 12 | Buying wins comfortably unless prices stagnate, because rent has compounded for a decade while the payment has not. |
What the Numbers Cannot Price
Owning fixes your housing cost against inflation, which over twenty years is worth a great deal — the mortgage payment is flat while rent compounds. It also means repairs are yours, moving is slow and expensive, and a large share of net worth is concentrated in one asset in one town. Renting buys flexibility and liquidity, which are worth most exactly when a career or a family situation is unsettled.
Frequently Asked Questions
Is renting throwing money away?
No more than mortgage interest is. In the first year of a 30-year loan at 6.71%, roughly 85% of each payment is interest, tax and insurance — money that builds no equity either. The recoverable part is the principal, and early on it is small.
What appreciation rate should I assume?
Long-run U.S. home prices have risen close to inflation plus about 1%, so 3–4% is a defensible assumption. Rates above 5% in a ten-year projection should be treated with suspicion.
Does the tax deduction change the answer?
Far less than it used to. Since the 2017 standard deduction increase, the large majority of U.S. homeowners do not itemise, so mortgage interest gives them no tax benefit at all. The calculator therefore leaves it out.