Rent vs Buy Math: The Formula and a Worked Example

Rent and a mortgage payment cannot be compared directly. Part of each mortgage payment buys equity back, part of the rent pays for a roof and a plumber, and the down payment could have been earning something else. The comparison that works adds up what each path costs for good and what each path leaves you with when the horizon ends. Below: the payment formula, a fully worked example with round numbers, the year buying pulls ahead under four price-growth cases, how the mortgage rate moves that year, the three popular percentage rules of thumb, and a calculator. The money section has the neighbouring formulas.

How to calculate buying vs renting

A fair comparison runs the same budget through two paths and counts what each ends with. Mortgage payment and rent are only the start.

1. Find the monthly principal and interest. Lenders calculate it with a standard mathematical formula from the loan amount, the term and the interest rate⁶. For a mortgage loan of $100,000 over 30 years at four percent, it is $477 a month⁶.
2. Add what owning costs besides the loan. The total monthly payment often includes homeowners' insurance and taxes on top of principal and interest⁶. Maintenance and repair costs come on top of that⁴.
3. Count the cash needed up front. The down payment plus closing costs, which typically run 2% to 6% of the purchase price³.
4. Give the renter the same budget. The renter invests the down payment and closing money at the start, and invests each month whatever owning would have cost above the rent.
5. Compare net worth at the end of the horizon. The owner has the home's value, less the selling costs and the mortgage balance. The renter has the invested pile.

The principal-and-interest formula is M = P × r ÷ (1 − (1 + r)^−n), where P is the loan, r the monthly rate (the yearly rate divided by 12) and n the number of monthly payments⁶.

Worked example (our arithmetic). Inputs: the loan of $100,000 over 30 years at 4% that gives $477⁶.

Worked example: a $400,000 home against $2,000 rent

The home price and rent below are round numbers chosen for the example, and every other input is stated. The mortgage rate is the current market: the 30-year fixed-rate mortgage averaged 7.40% as of October 15, 2026, against 6.27% a year earlier². The survey behind that figure is based on rates from thousands of loan applications submitted to Freddie Mac². All figures that follow are our arithmetic.

The effective property tax rate is total real taxes paid divided by total home value⁷. In 2024 it ranged from 0.29% in Hawaii to 1.88% in New Jersey, with Colorado at 0.50%⁷. Housing experts recommend setting aside 1-3 percent of a home’s market value each year for maintenance and repair costs⁴. Those funds cover large future expenses such as a new heating and air conditioning unit or a roof⁴.

Worked example (our arithmetic). Monthly costs at purchase, inputs above⁶⁷⁴.

Cash needed at the start is $80,000 plus closing costs: $88,000 at the 2% end of the range, $92,000 at 3% and $104,000 at the 6% end (our arithmetic)³.

Here is the first year’s cost of owning that never comes back, set against appreciation (our arithmetic). The interest on a $320,000 loan at 7.40% is $23,579 in year one, and the 5% annual return on the $92,000 tied up is the money the owner gives up by not investing it⁶.

At 3% price growth the net cost of owning for the first year, $24,179, is almost the same as the $24,000 of rent (our arithmetic)⁸. Smaller growth tips the first year toward renting and larger growth tips it toward buying⁸.

When does buying pull ahead?

Buying starts behind, because of closing costs and the selling costs that come out of the sale price, and it catches up as the loan balance falls and the home gains value. Transaction costs can easily erase any gains from an increase in the value of your home if you sell less than five years after moving in¹.

Worked example (our arithmetic). Buyer’s net worth minus renter’s net worth, with the example inputs, after the number of years in the first column. A negative number means renting leaves more²³⁴⁷.

The first year buying is ahead is year 9 at 4% growth, year 17 at 3% and year 25 at 2%, and not within 30 years at 0% (our arithmetic)².

The yearly price growth is the least certain input, and the Federal Reserve’s longer-run inflation goal of 2 percent, measured by the personal consumption expenditures price index, gives the 2% case a reference point as flat in real terms⁹. Over the long term, stocks have historically yielded better returns than real estate, though home prices can rise faster than stocks in any given year¹. The model assumes the renter earns 5% and the owner’s home grows 0% to 4% (our assumptions), so the answer moves with both.

How the mortgage rate moves the break-even year

The same home, rent and assumptions with different mortgage rates (our arithmetic). The 6.27% row is the rate a year before the October 15, 2026 survey².

Moving from 6.27% to 7.40% adds $241.16 to the monthly payment on the same loan (our arithmetic)²⁶. That pushes the 3% break-even from year 9 to year 17.

What is the 5% rule for renting vs. buying?

The 5% rule compares the unrecoverable costs of renting and owning¹. If a year’s worth of rent adds up to less than 5% of the value of a similar home, being a tenant is financially attractive, and if the rent is more than 5%, owning might be worth considering¹. The reasoning is that interest on a mortgage and property taxes do not build home equity, so they count as costs that do not come back¹.

Worked example (our arithmetic). Inputs: $2,000 a month of rent and a $400,000 home¹.

The rule’s own example is the same rent: $24,000 a year is 5% of $480,000¹. At 6.00% the rule leans toward owning for a $400,000 home. Our year-one table shows why the 5% is an assumption and not a constant: at a 7.40% mortgage rate the costs that do not come back were 9.04% of the price before price growth, and 6.04% after 3% growth (our arithmetic)²⁶. The threshold moves with the mortgage rate.

What is the 2% rule for rentals?

Rental investors use the 2% rule as a screen, and it does not test renting against buying¹⁰. The rule advises that for an investment property to have positive cash flow, the monthly rent should equal or exceed two percent of the purchase price¹⁰. A $200,000 property needs $4,000 of monthly rent¹⁰. It is a fast way to guess cash flow potential and a benchmark when evaluating investments¹⁰.

Worked example (our arithmetic). Inputs: the $400,000 home and the 2% rule¹⁰.

The 0.50% is a quarter of the 2% the rule asks for (our arithmetic)¹⁰. A screen built for cash flow on rentals leaves out whether living in a home beats renting one.

What is the 30% rule for rent?

The 30% rule is an affordability yardstick, not a break-even test. A household is cost burdened when monthly housing costs, utilities included, exceed 30% of monthly income, and severely cost burdened above 50%⁵. It applies to renters and owners alike.

Worked example (our arithmetic). Inputs: the monthly costs from the example, utilities left out⁵.

Utilities, insurance and association dues would raise both figures, since the definition counts utilities⁵.

Taxes: mortgage interest vs the standard deduction

Interest and points on a loan secured by a main or second home count as qualified mortgage interest (IRS Topic 505)¹¹. It is deductible only as an itemized deduction on Schedule A¹¹. For homes acquired after December 15, 2017 the debt limit is $750,000, or $375,000 if married filing separately¹¹. State and local taxes are capped at $40,000 ($20,000 if married filing separately)¹². Itemizing pays only when allowable itemized deductions exceed the standard deduction¹³.

Worked example (our arithmetic). Year-one itemized total: $23,579 of interest plus $4,000 of property tax, $27,579¹¹¹². The 2026 standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly¹⁴.

A single filer with a 22% marginal rate would save 22% × $11,479 = $2,525 in federal tax in year one (our arithmetic)¹³. The tax bracket page shows how a deduction turns into tax saved at each marginal rate.

Costs that tip the horizon

Closing costs can include loan origination fees, discount points, the appraisal fee, survey, title insurance, legal fees and prepaid taxes and insurance³. They typically run 2% to 6% of the purchase price³. A home sale can exclude up to $250,000 of gain from income, or $500,000 on a joint return (IRS Topic 701)¹⁵. To qualify the owner must have owned and used the home for at least 24 months out of the last 5 years¹⁵.

In the example the home is worth $537,567 after 10 years at 3% growth, a gain of $137,567 over the $400,000 price, which is under the $250,000 limit before counting costs (our arithmetic)¹⁵. In the Federal Reserve’s 2022 Survey of Consumer Finances the homeownership rate was 66.1 percent, and the median net housing value of families that owned a home was $201,000¹⁶.

Try your own numbers

The defaults reproduce the 10-year, 3%-growth row of the table above, with a 30-year fixed loan²⁶. The calculator ignores income taxes on investment returns, utilities and any mortgage-interest tax benefit, and it leaves rent control, job moves and the pleasure of owning out of the arithmetic. It compares dollars and is not advice to rent or to buy.

For the payment formula in more detail, see the loan payment formula; for the cost of a loan expressed as a yearly rate, APR vs APY; and for how long a balance takes to clear, how long it takes to pay off a loan. The CFPB’s mortgage payment explainer and HUD’s housing counselor glossary are the government sources for the payment and closing-cost figures above.