What owners pay and don’t get back
Only the part of a mortgage payment that pays down the loan builds wealth. These don’t:
| Cost | Roughly, each year |
|---|---|
| Mortgage interest | Most of each payment in the early years |
| Property tax | Often around 1% of the value |
| Maintenance and repairs | Often 1% or more of the value |
| Insurance | Varies widely by state |
| What the down payment could earn | The return you give up by not investing it |
The 5% rule of thumb
A quick way to compare: the costs of owning that you don’t get back come to roughly 5% of the home’s value a year (about 1% property tax, 1% maintenance and 3% for the cost of the money tied up in it, through interest or lost investment returns).
Example: a $400,000 home
| Part | Amount |
|---|---|
| Property tax (about 1%) | $4,000.00 |
| Maintenance (about 1%) | $4,000.00 |
| Interest or lost investment returns (about 3%) | $12,000.00 |
| Costs you don’t get back, a year | $20,000.00 |
A rough guide: property tax, upkeep and interest rates vary a lot from place to place.
5% of $400,000 is $20,000 a year, or about $1,670 a month. If you could rent a similar home for less than that, renting may cost less, as long as you invest what you save.
It’s a rough guide: rates, prices and taxes vary a lot from place to place.
A fuller comparison
The rent vs buy calculator follows a buyer and a renter year by year, with the renter investing what they don’t spend on owning:
A $400,000 home with $80,000 down, at 7.24% over 30 years, against rent of $2,200 a month. Home prices and rent rise 3% a year, and money not spent on housing earns 5%:
| Amount | |
|---|---|
| Mortgage payment | $2,181 a month |
| Owning, first month, with tax, insurance and upkeep | $3,031 a month |
| Closing costs to buy | $12,000 |
| Ahead after 7 years | Renting by $31,895 |
| Buying pays off after | 15 years |
Who’s ahead depends mostly on how long you stay:
| Stay | Buyer has | Renter has | Ahead |
|---|---|---|---|
| 3 years | $100,889 | $137,491 | Renting by $36,602 |
| 5 years | $133,906 | $169,058 | Renting by $35,152 |
| 7 years | $169,689 | $201,583 | Renting by $31,895 |
| 10 years | $229,182 | $252,076 | Renting by $22,894 |
| 15 years | $346,752 | $340,259 | Buying by $6,493 |
| 20 years | $497,121 | $436,065 | Buying by $61,056 |
| 30 years | $1,005,688 | $710,305 | Buying by $295,384 |
And on prices, rates and rent where you live:
| If | Ahead after 7 years | Buying pays off after |
|---|---|---|
| The example | Renting by $31,895 | 15 years |
| Home prices rise 1% a year | Renting by $86,313 | 28 years |
| Home prices rise 5% a year | Buying by $29,499 | 5 years |
| Mortgage rate 6.24% | Renting by $5,967 | 8 years |
| Mortgage rate 8.24% | Renting by $58,103 | 24 years |
| Investments earn 3% a year | Renting by $10,436 | 9 years |
| Investments earn 7% a year | Renting by $55,725 | Not within 30 years |
| Rent of $1,800 | Renting by $75,395 | Not within 30 years |
| Rent of $2,600 | Buying by $11,606 | 6 years |
When buying makes more sense
- You’ll stay put for years. Buying and selling cost several percent of the price, which takes years to earn back.
- You want stability: no rent rises, no landlord deciding when you move.
- You’d never invest the difference. For many people a mortgage is a forced saving plan, and that’s a real benefit.
Bottom line
Rent buys you a home to live in, which is what you’re paying for, just as an owner’s interest and property tax are. Compare the full costs, not rent against the mortgage payment. The affordability calculator shows the full monthly cost of buying.