Enter Values

Home Purchase
$
%
%
Homeownership Costs
%
$ /yr
%
%
%
Rental
$ /mo
%
Financial Assumptions
%
%
%
Time Horizon
years
How It Works
Buy Wealth = Home Equity − Selling Costs − Closing Costs
Rent Wealth = Invested Down Payment + Invested Closing Costs + Invested Monthly Savings
Breakeven = First year Buy Wealth ≥ Rent Wealth
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Recommendation

Buy
Breakeven: Year 8
Buy Wealth --
Rent Wealth --
Net Advantage --

Monthly Cost Comparison (Year 1)

Buying
Mortgage (P&I) --
Property Tax --
Insurance --
Maintenance --
PMI --
Tax Benefit --
Net Monthly (Buy) --
Renting
Rent --
Renter's Insurance --
Net Monthly (Rent) --

Cumulative Cash Outflow

Total Spent (Buy) --
Total Spent (Rent) --

Wealth Over Time

Monthly Cost Breakdown (Year 1)

Sensitivity Analysis

Net wealth advantage (Buy − Rent) at different appreciation rates and time horizons:

Model Assumptions
  • Fixed mortgage interest rate for the entire term
  • Constant annual home appreciation, rent increase, and investment return rates
  • Simplified tax benefit: mortgage interest × marginal rate (assumes itemizing)
  • PMI at 0.5% of original loan amount; modeled as dropping at 80% LTV
  • Renter's insurance at $200/year
  • Home insurance is flat (not indexed to home value)
  • No HOA fees, capital gains exclusion, or SALT cap modeled
  • Renter invests down payment, avoided closing costs, and monthly savings at the investment return rate

For educational purposes. Not financial advice. Market conventions simplified.

Understanding the Rent vs Buy Decision

The True Cost of Homeownership

The cost of owning a home goes far beyond the mortgage payment. Property taxes, homeowner's insurance, maintenance (typically 1% of home value per year), and potentially PMI all add to the monthly expense. However, each mortgage payment builds equity, and home appreciation can grow your net worth over time.

Opportunity Cost of the Down Payment

When you put $70,000 down on a home, that money is no longer available to invest in the stock market or other assets. If those funds could earn 7% annually in a diversified portfolio, the renter's invested down payment grows significantly over time. This opportunity cost is one of the most overlooked factors in the rent vs buy decision.

The Breakeven Horizon

The breakeven year is when the buyer's net wealth (home equity minus selling costs) first exceeds the renter's invested wealth. Before this point, the renter is ahead because the buyer has paid substantial upfront costs. Typical breakeven periods range from 5 to 10 years, depending on local housing costs, mortgage rates, and investment returns.

When Renting Makes More Financial Sense

Renting can be the better financial choice when: you plan to move within a few years, home prices are high relative to rents (high price-to-rent ratio), mortgage rates are elevated, you can earn strong investment returns, or when the local market has low appreciation potential. The sensitivity table above shows how these factors interact.

Kapoor's Rule of Thumb: Compare the annual cost of each option including opportunity costs. A price-to-rent ratio below 15 generally favors buying; above 20 favors renting.

Frequently Asked Questions

This calculator runs a year-by-year financial simulation comparing homeownership and renting. For buying, it computes mortgage payments using the standard amortization formula, adds property taxes, insurance, maintenance, and PMI (if applicable), then subtracts the tax benefit of mortgage interest. For renting, it grows rent annually and assumes the renter invests the down payment, avoided closing costs, and any monthly cost savings at your expected investment return rate. The breakeven year is the first year where the buyer's net wealth (home equity minus selling costs) exceeds the renter's invested wealth.

The breakeven year is when the net wealth from buying first exceeds the net wealth from renting and investing. Before this year, the renter is financially ahead because the buyer has paid large upfront costs (closing costs, down payment tied up in equity) that haven't yet been recovered through appreciation. The breakeven year helps you decide how long you need to stay in a home for buying to make financial sense. If you plan to move before the breakeven year, renting is typically the better financial choice.

Private Mortgage Insurance (PMI) is required when your down payment is less than 20% of the home price. This calculator models PMI at 0.5% of the original loan amount per year, which is near the industry average. PMI is modeled as dropping when your loan-to-value ratio reaches 80%, meaning your remaining mortgage balance is 80% or less of your home's current value. This simplified model accounts for both mortgage payments reducing your balance and home appreciation increasing your home's value.

Opportunity cost is the return you give up by choosing one option over another. When you buy a home, your down payment and closing costs are tied up in home equity instead of being invested in stocks or other assets. This calculator accounts for this by modeling the renter investing the equivalent of the down payment and avoided closing costs at your expected investment return rate. Additionally, if monthly buying costs exceed renting costs, the renter invests those monthly savings too. This is why a high expected investment return can tip the decision toward renting, even if the home appreciates well.

No. Home appreciation helps the buyer build equity faster, but it must overcome several costs: closing costs on purchase and sale (typically 3% + 6% = 9% of home value), property taxes, insurance, maintenance, and the opportunity cost of the down payment. In a low-appreciation environment (1-2% annually), the renter who invests the down payment at a higher market return may come out ahead over most time horizons. The sensitivity table in this calculator shows exactly how appreciation rate and time horizon interact to change the recommendation.

This calculator includes two types of closing costs, both editable. Buyer closing costs (default 3% of purchase price) cover title insurance, appraisal fees, loan origination fees, and other transaction costs at purchase. Seller closing costs (default 6% of home value at time of sale) cover real estate agent commissions, transfer taxes, and other selling expenses. Both reduce the buyer's net wealth, while the renter benefits from investing the avoided buyer closing costs.
Disclaimer

This calculator is for educational purposes only and uses simplified assumptions including constant rates and a basic tax benefit estimate. Actual costs vary by location, lender, and individual tax situation. Consult a financial advisor and tax professional before making housing decisions. This tool should not be used as the sole basis for a rent vs buy decision.

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