Why comparing rent to a mortgage payment is the wrong comparison
“My mortgage would be $2,000 and my rent is $2,200, so buying is cheaper” is the most common mistake in household finance, and it is wrong twice over.
It is wrong on the cost side because a mortgage payment is not the cost of owning. Add property tax, insurance, maintenance, association dues and any mortgage insurance and the owner's monthly outlay in the default case here is $2,889, not the $2,023 of principal and interest. It is also wrong in the other direction, because part of that payment is principal — money moving from one of your pockets to another, not money spent.
And it is wrong on the balance-sheet side because the renter is holding something the buyer is not: the down payment and closing costs, in cash, earning a return. On a $400,000 purchase with 20% down and 3% closing costs, that is $92,000 the renter still has and the buyer does not.
So the comparison that means anything is a net-worth comparison. Give both households the same starting cash and the same monthly budget. Let the owner build equity through principal payments and appreciation; let the renter build a portfolio. Sell the house at the horizon, pay the agent, clear the loan, and see who is worth more. That is what this calculator does, month by month.
The two balance sheets, month by month
The owner's side. The mortgage payment comes from the standard amortised-loan formula the mortgage payment calculator uses. Each month, interest accrues on the balance and the rest of the payment retires principal. Property tax and the insurance-and-maintenance allowance are charged against the home's current value, so they grow with appreciation rather than staying fixed. If the down payment is under 20%, mortgage insurance is added at 0.55% of the balance a year until the balance falls below 80% of the purchase price.
The renter's side. Rent starts at today's figure and compounds at your growth rate. The down payment and buying closing costs are invested from day one at your assumed return.
The link between them. Both households are assumed to spend the same amount on housing plus saving each month. In any month where owning costs more, the renter invests the difference; in any month where renting costs more, the owner invests the difference. Without this rule the comparison is rigged — pure cost comparisons flatter buying by ignoring the invested down payment, and pure “rent is dead money” arguments flatter it further by ignoring taxes and upkeep.
At the horizon. The house sells for P(1 + a)N, selling costs come off, the remaining mortgage balance is repaid, and whatever is left joins the owner's investment pot. The renter's net worth is simply their portfolio. The difference is the answer, and the calculator computes it at every year end so you can see where the lines cross.
Worked example: a $400,000 home against $2,200 rent, held seven years
Take the defaults: 20% down, 6.5% over 30 years, property tax 1.1% and insurance-plus-upkeep 1.5% of value a year, 3% closing costs to buy and 6% to sell, rent $2,200 growing 3% a year, home appreciation 3%, invested cash earning 6%.
- Loan and cash. Loan = 400,000 × 0.80 = $320,000. Cash at closing = 80,000 + 12,000 = $92,000, which the renter invests instead.
- Mortgage payment. The 6.5% thirty-year factor is 6.32068 per $1,000, so 320 × 6.32068 = $2,022.62.
- Owner's first month. Property tax = 400,000 × 1.1% ÷ 12 = $366.67. Insurance and upkeep = 400,000 × 1.5% ÷ 12 = $500.00. No mortgage insurance at 20% down. Total = 2,022.62 + 366.67 + 500.00 = $2,889.28, against $2,200 of rent — the owner is $689.28 a month worse on cash flow at the start, and the renter invests that difference.
- Seven years on. The house is worth 400,000 × 1.037 = $491,950. Selling costs of 6% take $29,517 and $289,332 of mortgage is still owing, leaving $173,101 of equity. The owner has no investment pot at all, because owning costs more than renting in every one of the 84 months — rent only reaches $2,889 a month in the ninth year.
- The verdict. Owner net worth is $173,101; renter net worth is $195,602. The renting household is $22,502 ahead. The two paths cross in year 13.
- The pure cost view. Ignoring investment returns entirely, the net cost of owning over the seven years is $169,579 and total rent paid is $205,056 — owning looks $35,477 cheaper. The two views disagree because the cost view gives the renter no credit for the $92,000 they never handed over.
Both figures are correct answers to different questions, and the disagreement between them is the single most important thing on this page. Which one you should act on depends on whether the alternative to buying is genuinely investing that cash, or spending it.
What actually moves the answer
The gap between appreciation and investment return. Look at the reference table below: holding everything else at the defaults, appreciation of 0% leaves the owning household $99,802 behind at seven years, while 5% appreciation puts it $37,499 ahead. Nothing else in the model has that range. Since neither rate is knowable, the honest use of this calculator is to find the appreciation rate at which the verdict flips and ask whether you believe it.
The holding period. Buying carries a large fixed cost — 3% to buy and 6% to sell is 9% of the price, most of it unavoidable — and that cost is spread over however many years you stay. Short holds rarely survive it. The break-even year output tells you how long the model needs before ownership catches up, and if that number is longer than your realistic horizon, the decision is made.
The price-to-rent ratio. Dividing the price by twelve months of rent gives a fast sanity check that needs no forecasts at all. The default case is 400,000 ÷ 26,400 = 15.2. As a rule of thumb practitioners treat ratios under about 15 as favouring buying and over about 20 as favouring renting, with the middle depending on rates and costs. It is crude — it ignores the mortgage rate entirely — but it is a useful first filter before you start arguing about appreciation.
What the model cannot price. Security of tenure, the freedom to renovate, the cost and disruption of a forced move, the discipline that a mortgage imposes on saving, and the risk that a renter simply spends the difference rather than investing it. That last one is not a small caveat: the entire renting case in this model rests on the $92,000 actually being invested at 6%.
How the verdict moves with home appreciation
| Appreciation | At 5 years | At 7 years | At 10 years | Break-even year |
|---|---|---|---|---|
| 0% | −$83,485 | −$99,802 | −$120,005 | 28 |
| 1% | −$65,728 | −$75,618 | −$87,139 | 26 |
| 2% | −$47,229 | −$49,878 | −$50,961 | 22 |
| 3% | −$27,964 | −$22,502 | −$11,188 | 13 |
| 4% | −$7,910 | +$6,595 | +$32,480 | 7 |
| 5% | +$12,956 | +$37,499 | +$80,367 | 4 |
Read the last column first. With a 6% investment return assumed for the renter, ownership needs appreciation somewhere between 3% and 4% a year before it overtakes renting inside a typical holding period. Lower the investment return and every break-even year in the column falls.
Assumptions this model makes, and what it leaves out
- No income tax on either side. The renter's investment return is shown before tax, and the owner gets no mortgage-interest deduction. Since the 2017 standard-deduction increase most filers do not itemise, and a taxable brokerage account pays tax on gains, so the two omissions partly offset — but if you itemise and hold in a tax-advantaged account, model both yourself.
- Rent and appreciation grow smoothly. Real housing markets move in steps and can fall. A 3% average with a 20% drawdown in year six produces a very different outcome for anyone forced to sell in year seven.
- Maintenance is a flat percentage. In reality it is lumpy — a roof, a furnace, a sewer line — and it arrives when it arrives, not in equal monthly instalments.
- No mid-course refinance. If rates fall you would likely refinance; the refinance break-even calculator handles that separately and would improve the owning case.
- The renter genuinely invests the difference. This is the assumption most likely to fail in practice, and the whole renting case depends on it.
- Selling costs at 6% are conservative in some markets. After the 2024 changes to how buyer-agent commissions are negotiated, some sellers pay less. Lower the figure if you have a quote.
- No moving, transaction or vacancy frictions on the renting side. A renter forced to move every two years incurs real costs the model does not charge them.
Using the result alongside the other questions
This calculator answers “which path leaves me wealthier”, which is one of three questions a buyer has to settle. The second is affordability — whether a lender will approve you and whether the payment fits your income — and that is the province of the home affordability calculator, which applies the front-end and back-end debt-to-income ceilings underwriters actually use. The third is structure: what the loan costs over time, which the amortization schedule calculator lays out payment by payment.
Sequence them in that order. There is no point optimising a rent-versus-buy decision at a price you cannot finance, and no point agonising over appreciation forecasts if the payment leaves nothing for retirement contributions.
Two structural facts are worth holding on to. Ownership is a leveraged, undiversified bet on one property in one town, funded with a loan — which is why it can beat a diversified portfolio in good decades and lose badly in bad ones. And the transaction costs are large and front-loaded, which makes holding period the variable most under your control and the one most people mis-estimate. If you are genuinely unsure how long you will stay, that uncertainty is itself an argument, and it does not point towards buying.