Rent vs Buy: The Math Behind the Decision

"Renting is throwing money away." You have probably heard this before. It sounds logical on the surface, but the math tells a more complicated story. Whether renting or buying costs less depends on factors most people never consider.

The rent vs buy decision is not just about comparing your rent payment to a mortgage payment. That comparison ignores most of what actually matters: the opportunity cost of your down payment, the true costs of homeownership, and how long you plan to stay. Let me walk you through the math that our Rent vs Buy Calculator uses to help you make this decision.

The opportunity cost nobody talks about

When you buy a home, your down payment gets locked into the property. A 20% down payment on a $400,000 home is $80,000 that could have been invested elsewhere. Add closing costs (typically 2-5% of the home price), and you might have $90,000 or more tied up in the purchase.

If you rent instead, that $90,000 could be invested in the stock market. Historically, the S&P 500 has returned about 7% annually after inflation. Over 10 years, $90,000 invested at 7% grows to roughly $177,000.

Of course, your home will (hopefully) appreciate too. But home prices historically grow at about 3-4% per year, while the stock market averages 7-10%. The gap matters.

The true cost of homeownership

Your mortgage payment is just the beginning. Here is what homeownership actually costs:

The exit costs are what really hurt. You pay to get in, and you pay even more to get out.

In this example, a $400,000 home appreciates to $460,000 over 5 years. But after paying 6% commission ($27,600) and 2% closing costs ($9,200), your $60,000 gain becomes $23,200. That is a 61% haircut.

The break-even point

The break-even point is when the total cost of buying equals the total cost of renting. Before this point, renting is cheaper. After it, buying pulls ahead.

The typical break-even is 5-7 years, but it varies wildly. In expensive coastal cities with high price-to-rent ratios, it can be 10+ years. In cheaper markets with high rents relative to home prices, it might be just 2-3 years.

How our calculator works

We project costs forward year by year for both scenarios:

For renting

Total rent paid (increasing annually) + renter's insurance + upfront costs, minus the investment returns you would earn on your down payment money, minus your security deposit returned at the end.

For buying

Down payment + closing costs + all mortgage payments + property taxes + insurance + maintenance + HOA + selling costs, minus the equity you build, minus home appreciation, minus any tax savings from the mortgage interest deduction.

The calculator then shows you which option costs less at your chosen time horizon, and finds the break-even point where they cross.

The tax benefit myth

You might have heard that homeownership comes with tax benefits. This was more true before 2017.

The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction to $14,600 for single filers and $29,200 for married couples (2024 figures). To benefit from the mortgage interest deduction, your itemized deductions need to exceed these amounts.

For most homeowners, especially those with smaller mortgages or in lower-tax states, the standard deduction is higher than their itemizable expenses. Our calculator checks whether you would actually benefit.

What changes the answer

Small changes in assumptions can flip the outcome. Our calculator includes sensitivity analysis showing results under different scenarios:

If buying only wins under optimistic assumptions, that is a sign to be cautious. If renting only wins under pessimistic assumptions, buying is probably the safer bet.

When the math does not matter

Sometimes the right decision has nothing to do with spreadsheets.

Buying might make sense even if the math says rent because you want the stability of a fixed housing cost, you want to customize your space, you are putting down roots for 10+ years, or building equity feels more tangible than watching a brokerage account grow.

Renting might make sense even if the math says buy because you value flexibility, you do not want maintenance responsibilities, the local market feels overheated, or you prefer to invest your money elsewhere.