Comparing a payment to rent is the wrong comparison
The instinct is to line up a mortgage payment against a rent cheque and pick the smaller one. That comparison is broken in both directions: it ignores the taxes, insurance and maintenance an owner pays on top of the mortgage, and it ignores that part of a mortgage payment is savings rather than spending.
What owning actually costs each month
A $420,000 home, 20% down, 6.5% on a 30-year fixed:
| Component | Monthly |
|---|---|
| Principal & interest | $2,123.75 |
| Property tax (1.1%/yr) | $385.00 |
| Insurance (0.5%/yr) | $175.00 |
| Maintenance (1%/yr) | $350.00 |
| Total monthly | $3,033.75 |
The mortgage payment is $2,123.75. The real monthly cost is $3,033.75 — roughly 43% higher. Any comparison against rent has to use the second number, plus closing costs spread across however long you stay.
The 5% rule as a quick screen
A fast approximation: annual unrecoverable cost of owning is around 5% of the property value — roughly 1% maintenance, 1% property tax and 3% cost of capital. Divide by 12 for a monthly figure comparable to rent.
$420,000 × 5% = $21,000/year
→ $1,750/month equivalent rent
| Home price | 5% rule monthly | P&I at 6.5% |
|---|---|---|
| $300,000 | $1,250 | $1,517 |
| $420,000 | $1,750 | $2,124 |
| $550,000 | $2,292 | $2,781 |
| $700,000 | $2,917 | $3,540 |
If comparable homes rent for less than the 5% figure, renting is likely cheaper on a pure cost basis. If they rent for more, buying probably wins — provided you stay long enough.
Time is the deciding variable
Buying carries large one-off costs: roughly 2–5% of the price to buy, and 6–10% to sell once agent commissions are counted. On a $420,000 home that is somewhere near $33,600 in round-trip friction, and it has to be spread over your holding period.
- Under 3 years — renting almost always wins; transaction costs dominate.
- 3 to 5 years — genuinely close, and highly sensitive to local price movement.
- Over 5 years — buying usually pulls ahead, as principal builds and the payment stays fixed while rents rise.
What the spreadsheet cannot price
Renting buys mobility and a predictable ceiling on costs — no roof replacement lands in your lap. Owning buys stability, control over the space, and a fixed principal-and-interest payment while rent tracks inflation.
Neither is universally correct. Someone likely to change city in two years and someone settled with school-age children are answering different questions with the same arithmetic.
Model your own numbers in the rent vs buy calculator, and check the borrowing side against what you can actually afford.
Run your own numbers
FAQ
Is it cheaper to rent or buy?
How long do I need to stay for buying to make sense?
Is renting throwing money away?
Should I wait for rates to drop before buying?
What percentage of income should housing be?
Sources
Primary references used for the figures and rules on this page.
- Owning a Home — Consumer Financial Protection Bureau
- Publication 936, Home Mortgage Interest Deduction — IRS
- House Price Index — Federal Housing Finance Agency