Rent vs. Buy Calculator

The True Math Behind Renting vs. Buying in the United States

The decision to buy a home or continue renting is one of the largest financial commitments most Americans will ever make. While popular culture often equates renting to "throwing money away," rigorous financial analysis reveals that renting can frequently build superior net worth under the right circumstances.

A true comparison must evaluate unrecoverable costs on both sides:

• Unrecoverable Costs of Renting: Purely your monthly rent check. You have zero liability for property depreciation, structural maintenance, roof repairs, or property tax hikes.
• Unrecoverable Costs of Buying: Mortgage interest, local property taxes (which average between 0.5% and 2.5% across US states), homeowners insurance, HOA fees, ongoing maintenance (typically 1% to 2% of home value annually), and transaction friction (typically 6% real estate commissions plus 2–3% in closing costs when selling).

The "5% Rule" Quick Benchmark

Popularized in quantitative personal finance, the 5% Rule provides a quick heuristic to compare home values to monthly rental costs:

The 5% is composed of:

• 1% Property Tax: Average US nationwide effective rate.
• 1% Maintenance & Capital Repairs: Sinking fund for HVAC, roofing, plumbing, and wear.
• 3% Cost of Capital: The spread between mortgage debt/equity opportunity cost and expected long-term inflation-adjusted housing appreciation.

For a $400,000 home, $400,000 × 0.05 / 12 = $1,667 per month. If you can rent an equivalent home for under $1,667, renting and investing the difference in low-cost index funds is often mathematically superior. If rent exceeds $1,667, buying begins to take the lead.

Step-by-Step Worked Example

Let's evaluate a realistic scenario for a US homebuyer comparing a $400,000 single-family home against a comparable rental at $2,200/month over a 7-year horizon:

1. Purchase Outlay: 20% down payment ($80,000) at 6.5% interest on a 30-year fixed loan ($320,000 balance). Monthly Principal & Interest is $2,022.62.
2. Additional Ownership Costs: Property tax ($400/mo at 1.2%), insurance ($125/mo), HOA ($100/mo), and maintenance ($333/mo at 1%). Total monthly ownership outlay: $2,980.62.
3. Renter Advantage: The renter starts at $2,200/month ($780.62 cheaper per month) and keeps their $80,000 down payment fully invested in the market at a 7% projected return.
4. At Year 7:
   • The home has appreciated at 3.5% annually to ~$509,000. The remaining mortgage balance is ~$291,000. After deducting 6% selling costs (~$30,500), the buyer's net proceeds/wealth are approximately $187,500.
   • The renter's invested $80,000 down payment plus the invested monthly monthly cash differences compounded at 7% grow to approximately $185,000.
   • The break-even point in this model occurs right around Year 6 to 7. Prior to Year 6, transaction costs make renting wealthier; after Year 7, equity accumulation and fixed-rate mortgage payments tip the scale decisively toward ownership.

US Tax Code Considerations for Homeowners

Since the Tax Cuts and Jobs Act (TCJA) substantially raised the standard deduction ($15,000 for single filers, $30,000 for married filing jointly in 2026), fewer than 10% of American homeowners itemize deductions. This means:

• Mortgage Interest Deduction: You only realize a federal tax benefit if your total itemized deductions (mortgage interest + SALT up to $10,000 + charitable contributions) exceed your standard deduction.
• SALT Cap: State and Local Tax deductions remain capped at $10,000, limiting the tax deductibility of high property taxes in states like New Jersey, New York, Texas, and California.
• Section 121 Capital Gains Exclusion: On the selling side, US homeowners enjoy a powerful tax advantage: up to $250,000 ($500,000 for married couples) in capital gains on the sale of a primary residence is 100% tax-free if you lived in the home for 2 of the past 5 years.

Frequently Asked Questions: Renting vs. Buying