Compare total costs, not monthly payments
A mortgage payment close to your rent does not mean buying costs the same. Owning has costs that renting does not, and renting leaves your savings free to grow. A fair comparison adds everything up over the years you expect to stay.
The costs of owning
- Mortgage interest: early on, most of each payment is interest rather than paying down the loan.
- Property tax and insurance.
- Upkeep: a common rule of thumb is about 1% of the home's value a year for repairs and maintenance.
- Buying and selling costs: fees, taxes and agent commissions, often several percent of the price each way.
- The down payment's lost return: money tied up in the house cannot earn interest or investment returns elsewhere.
Against these, the owner gains the home's rise in value and the loan they have paid off.
The costs of renting
Rent, rising over time, and renter's insurance. The renter keeps the down payment and buying costs invested, and if renting is cheaper each month, can invest the difference too.
The price-to-rent ratio
Divide the home price by a year's rent for a similar home. A $350,000 home that would rent for $1,750 a month ($21,000 a year) has a ratio of about 17. As a rough guide, ratios under about 15 tend to favor buying and ratios over about 20 tend to favor renting, but local prices, rates and taxes decide the real answer.
How long you will stay
Buying and selling costs are paid once, so they weigh heavily on short stays. Buying usually needs several years to come out ahead; if you may move within a few years, renting is often cheaper.
Calculators
The Rent vs Buy Calculator adds up both sides year by year with your own prices, rates and growth. The Home Affordability Calculator shows what price fits your income, and the Mortgage Calculator gives the monthly payment.