Rent vs Buy, Explained

After reading this you can compute the true long-run cost of buying a home against renting the same place, decide which one leaves you richer over your chosen horizon, and see why the answer flips when you change two assumptions.

What the comparison actually measures

Renting and buying both cost money. The honest question is not "which has a lower monthly payment" but "which leaves me with more wealth after N years, once I account for everything." That includes the equity a buyer builds, the money a renter invests instead of tying up in a down payment, and every recurring cost on both sides.

Here is the hook. Suppose you buy a 300,000 home with 20% down at a 6.5% mortgage rate, and you plan to stay 10 years. It feels obvious that owning beats renting because "rent is throwing money away." But with 3% home appreciation and a 6% return on invested cash, the numbers below show buying and renting end up remarkably close, and small changes to those two rates decide the winner.

When to use this, and when not to

Use the calculator when you have a specific home and a specific rent in mind and a rough idea how long you will stay. It answers a wealth question over a fixed horizon.

Do not use it as a live-or-die verdict. The result depends on forecasts of appreciation and investment return that nobody knows. It also ignores things that matter to you personally: the freedom to repaint a wall, the risk of a job move, the stress of a leaking roof. Treat the output as one number in a larger decision.

The calculator assumes you actually invest the money you save by renting. If a renter spends the down payment and the monthly difference instead of investing it, the comparison collapses and buying almost always wins on wealth.

The formula and the intuition

Both sides are reduced to a single number: net cost over the horizon. Lower net cost is better. Start with buying.

The monthly mortgage payment on a loan of principal P at monthly rate i over n months is the standard amortization formula:

M = P \cdot \frac{i(1+i)^n}{(1+i)^n - 1}

Here P is the loan amount (price minus down payment), i is the annual rate divided by 12, and n is the term in months. This is the same engine used by the Mortgage Calculator.

The buyer's net cost over the horizon is everything paid out, minus what the buyer walks away with:

C_{buy} = D + \sum_{t} M_t + \sum_{t} O_t - E_H

D is the down payment. The first sum is total mortgage payments made during the horizon. The second sum is ownership costs (maintenance, property tax, insurance), charged each year as a percentage of price. E_H is the equity cashed out at the end: the home's appreciated value minus the remaining loan balance. Subtracting equity is what stops "rent is throwing money away" thinking, because a mortgage payment is part interest (gone) and part principal (saved as equity).

The renter's net cost is rent paid, minus the growth of the invested down payment:

C_{rent} = \sum_{t} R_t - (D \cdot (1+r)^{H} - D)

R_t is rent in year t, growing each year. The term D \cdot (1+r)^H - D is the investment gain on the down payment over H years at return r. That gain reduces the renter's net cost, because it is money the renter has that the buyer does not.

A worked example with the demo numbers

Buying vs renting a 300,000 home over 10 years

Inputs: rent 1500/month growing 3% a year, price 300,000, 20% down, 6.5% rate, 30-year term, ownership costs 1.5% of price a year, appreciation 3%, investment return 6%, horizon 10 years.

Down payment: D = 0.20 \times 300{,}000 = 60{,}000. Loan P = 240{,}000.
Monthly rate i = 0.065 / 12 = 0.0054167, n = 360. The payment works out to M \approx 1517 per month.
Payments over 10 years: 120 \times 1517 = 182{,}000 (rounded).
Ownership costs: 0.015 \times 300{,}000 = 4{,}500 a year, so 45{,}000 over 10 years. (The tool can grow this with the home value; here treat it as flat for a clean check.)
Home value after 10 years at 3%: 300{,}000 \times 1.03^{10} \approx 403{,}200. Loan balance after 120 of 360 payments at 6.5% is about 203{,}300. Equity E_H \approx 403{,}200 - 203{,}300 = 199{,}900.
Buyer net cost: 60{,}000 + 182{,}000 + 45{,}000 - 199{,}900 \approx 87{,}100.
Rent over 10 years growing at 3%: 1500 \times 12 \times \frac{1.03^{10}-1}{0.03} \approx 206{,}300.
Invested down payment grows to 60{,}000 \times 1.06^{10} \approx 107{,}450, a gain of 47{,}450.
Renter net cost: 206{,}300 - 47{,}450 \approx 158{,}850.

On these assumptions buying wins by roughly 71,700 over 10 years. Note that this ignores the monthly cash-flow gap: the buyer pays about 1517 + 375 = 1892 a month while the renter starts at 1500, and a fuller model would invest that difference too. The tool's exact figure will differ slightly depending on how it handles cost growth and the reinvested monthly gap, but the shape holds.

Reading the result and testing the assumptions

The single output you care about is the difference between the two net costs. A positive gap for buying, as above, means owning left you wealthier on those inputs. What matters more is how fragile that gap is.

Two inputs dominate everything: home appreciation and investment return. Drop appreciation from 3% to 1% and the home is worth about 300{,}000 \times 1.01^{10} \approx 331{,}400 instead of 403,200, erasing roughly 72,000 of equity. That alone flips the earlier result. Raise investment return from 6% to 8% and the renter's gain on the down payment climbs from 47,450 to about 60{,}000 \times 1.08^{10} - 60{,}000 \approx 69{,}500.

Run the calculator three times: your realistic guess, a pessimistic case (low appreciation, high investment return), and an optimistic case. If buying wins in all three, the decision is robust. If the winner changes, the honest answer is "it depends," and you should weight the non-financial factors more.

With the demo inputs, buying costs about 87,100 net and renting about 158,850. The gap is the wealth advantage of owning on these assumptions.

How the horizon changes the answer

Time is the buyer's friend. In the first few years most of each mortgage payment is interest, and buying costs (closing, moving, agent fees at sale) have not been spread out. The break-even point is the horizon at which buying stops costing more than renting.

The chart below traces the net-cost gap (renter cost minus buyer cost) as the horizon grows on the demo inputs. Where the line crosses zero is roughly where buying starts to win.

Below about 6 years renting wins (negative values); beyond it buying pulls ahead. Short stays favor renting because buying and selling costs have little time to be recovered.

Common mistakes

The errors below turn a fair comparison into a rigged one.

Forgetting the invested down payment: A buyer locks 60,000 into a house. A renter can invest it. Ignoring that growth (about 47,450 over 10 years at 6%) unfairly favors buying.
Comparing payment to rent directly: A 1517 mortgage payment is not comparable to 1500 rent, because part of the payment builds equity. Only the interest and ownership costs are truly spent.
Ignoring transaction costs: Buying and selling a home costs real money (agent commissions, closing, transfer taxes), often 6% to 10% of price at sale. Over a 3-year stay this can dwarf any appreciation.
Optimistic appreciation: Assuming homes rise 6% a year forever is how people talk themselves into buying. Test 1% and 0%.
Treating rent as fixed: Rent grows. At 3% a year, a 1500 rent becomes 2016 after 10 years, which the model already accounts for.

Related tools

Once you have a leaning, these help with the mechanics. Use the Mortgage Calculator for the exact payment and amortization, and the Down Payment & LTV Calculator to see how a different deposit changes the loan. Check what you can borrow with the Home Affordability Calculator, and what rent fits your income with the Rent Affordability Calculator. If you already own, the Mortgage Extra Payment Calculator and the Biweekly Mortgage Calculator show how faster repayment cuts interest, and the Mortgage Refinance Calculator tests a new rate. To compare listings fairly, use Price per Square Meter Calculator, and for a partial first month of rent, Prorated Rent Calculator.

Frequently asked questions

Is buying always better if I stay long enough?

Usually, but not guaranteed. Longer horizons favor buying because equity compounds and transaction costs spread out. But if home appreciation stays below your investment return for the whole period, a disciplined renter who invests the difference can still come out ahead even over 20 years.

What appreciation rate should I assume?

Nobody knows the future. A conservative approach uses your local long-run average and then also tests a rate 2 points lower. If the buy decision only works at high appreciation, it is a bet, not a plan.

Why subtract equity from the buyer's cost?

Because part of every mortgage payment buys ownership you keep. If you paid 182,000 in payments but built 199,900 in equity, much of the payment was saving, not spending. Subtracting equity isolates the true cost of housing.

Does the calculator include closing and selling costs?

Check the tool's inputs. The core model shown here focuses on ownership costs, payments and equity. If your version does not add transaction costs, subtract 6% to 10% of the sale price from the buyer's ending equity yourself before comparing.

Should I put the money I save by renting into stocks?

The comparison assumes you invest it at the return you entered, but this is not advice to do so. The number only holds if you actually invest consistently. Spent savings make renting look worse than the model shows.

Try it yourself in the tool