“Rent is throwing money away” is one of the most repeated pieces of money advice, and it's only half true. Buying builds equity, but owning has costs that rent doesn't, and you give up what your savings could have earned. Here's how to compare them properly.
The costs of owning people forget
- Closing costs: typically 2–5% of the price when you buy.
- Selling costs: agent fees and other costs of around 6% when you sell.
- Maintenance: plan for about 1% of the home's value per year, more for older homes.
- Property tax, insurance and HOA fees, which tend to rise over time.
- Mortgage interest: in the early years, most of each payment is interest, not equity.
The cost of renting people forget
Renters don't build home equity, but they keep their down payment and closing costs. If that money is invested, it grows. A fair comparison assumes the renter invests that money, and any monthly savings, instead of spending it.
Time is the biggest factor
Because buying and selling are expensive, buying usually only wins if you stay long enough for home value growth and mortgage payoff to outweigh those costs, often five years or more. If you might move for work or family within a few years, renting is often cheaper.
A quick rule of thumb: the price-to-rent ratio
Price-to-rent ratio = home price ÷ yearly rent for a similar home
- Under about 15: buying tends to be favorable.
- 15 to 20: it depends on how long you'll stay and on interest rates.
- Over 20: renting tends to be cheaper.
A $400,000 home that would rent for $2,200 a month ($26,400 a year) has a ratio of about 15.
Run the numbers
The rent vs buy calculator compares your net worth after any number of years for both choices, including all the costs above, and shows the year buying starts to pay off. With a $400,000 home at 6.5%, 3% yearly home value growth and $2,200 rent, renting comes out slightly ahead after 10 years, which shows how close the decision can be.
It's not only about money
Owning gives stability, freedom to renovate and protection from rent increases. Renting gives flexibility and fewer surprise repair bills. Use the numbers to understand the cost of each choice, then decide what's worth it to you.
See what you can borrow with the 28/36 rule guide and the mortgage calculator.