Methodology: how we calculate
We believe a finance tool should show its work. This page documents the exact model behind the Rent vs Buy Calculator — the philosophy, every formula, our default assumptions, and a worked example you can reproduce by hand.
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The principle: compare net worth, not payments
The most common rent-vs-buy comparison — your mortgage payment versus your rent — is misleading. It ignores property tax, maintenance, insurance, and the large one-off costs of buying and selling, and it ignores what a renter could earn by investing the cash they didn't tie up in a home.
Instead we use an invest-the-difference net-worth model. Both scenarios deploy the same total cash at every point in time. The buyer puts cash into a home; the renter invests the equivalent cash in a diversified portfolio. We then compare each path's net worth over time and report the break-even horizon — the first month buying pulls ahead.
The monthly algorithm
We simulate month by month. For each month:
Buy path
- Upfront cash = down payment + buyer closing costs (spent at month 0).
- Monthly outflow = mortgage principal & interest + property tax + insurance + maintenance + hoa fee + pmi (mortgage insurance) (until 20.0% equity).
- Amortization: interest = balance × (rate ÷ 12); the rest of the payment reduces principal (your equity).
- Home value compounds at the appreciation rate; property tax and maintenance scale with it.
- Optional tax benefit (when the deduction toggle is on) = marginal rate × deductible interest + capped deductible property tax, credited yearly.
Rent path
- Monthly outflow = rent (growing at the rent-growth rate) + renter's insurance.
- Seed investment: the renter invests the buyer's upfront cash (down payment + closing) at month 0.
- Invest the difference: each month the cheaper path invests the surplus, so both deploy identical cash. Portfolios compound monthly at the investment-return rate.
Comparison & break-even
To compare fairly, we mark the home to market as if sold that month:
- Net worth (buy) = (home value − selling costs − remaining loan) + any buyer side-investments.
- Net worth (rent) = the investment portfolio balance.
- Break-even = the first month net-worth (buy) ≥ net-worth (rent). If it never happens within a 40-year window, we say so rather than inventing one.
A worked example you can reproduce
Inputs: rent $2,000/mo, price $400,000, 20% down, 6% rate, 30-year term, 7-year horizon; 3% appreciation, 3% rent growth, 5% investment return; 1% property tax, 1% maintenance, $1,200/yr insurance, 3% closing, 6% selling; no tax deduction.
| Quantity | Value |
|---|---|
| Loan amount (price − 20%) | $320,000 |
| Upfront cash (down + 3% closing) | $92,000 |
| Monthly principal & interest | $1,918.56 |
| Month-1 buy outflow (P&I + tax + ins + maint) | ≈ $2,685 |
| Month-1 rent outflow (rent + renter ins.) | $2,015 |
| Year-7 home value (3%/yr) | $491,950 |
| Year-7 loan balance | $286,846 |
| Year-7 equity if sold (value × 0.94 − balance) | $175,587 |
| Year-7 renter portfolio | $183,412 |
| Net worth — buy | $175,587 |
| Net worth — rent | $183,412 |
| Result at 7 years | Renting ahead by ≈ $7,825 |
| Break-even | 8 years 3 months |
Check it yourself: year-7 equity is $491,950 × 0.94 − $286,846 = $175,587. Because the buyer's monthly cost stays above the (slowly growing) rent for all seven years, the renter invests the difference every month and the buyer's side-portfolio stays at zero — so net-worth (buy) equals the home equity. Renting wins at 7 years here mainly because the 5% investment return outpaces 3% home appreciation; push the horizon to 8 years 3 months and buying catches up.
Our default assumptions (United States)
These are editable starting points, not forecasts or live quotes. Each reflects a long-run, middle-of-the-road assumption; change them to match your market and situation.
| Assumption | Default | Rationale |
|---|---|---|
| Mortgage rate | 6.5% | Editable assumption, not a live quote. |
| Loan term | 30 years | Options: 15, 20, 30 yrs. |
| Home appreciation | 3.5%/yr | Long-run nominal home-price growth assumption. |
| Investment return | 6.0%/yr | Opportunity cost of cash — a diversified portfolio assumption. |
| Rent growth | 3.0%/yr | Roughly tracks long-run inflation. |
| Property tax rate | 1.1%/yr | Of home value; varies widely by locality. |
| Maintenance | 1.0%/yr | Of home value — the common 1% rule of thumb. |
| Home insurance | $1,500/yr | Grows with inflation. |
| Closing costs (buyer) | 3.0% | Of purchase price, paid upfront. |
| Selling costs (agent + transfer) | 7.0% | Agent + transfer, paid on sale. |
| General inflation | 2.5%/yr | Grows fixed recurring costs. |
What we deliberately don't model
- Capital-gains tax on investment growth or home sale (a primary-residence exclusion often applies); both are shown pre-tax.
- Refinancing or variable-rate resets — we assume a fixed rate for the term.
- Itemization nuance beyond a simple cap — the optional deduction is a simplification and defaults off.
- Transaction timing risk — selling exactly at the horizon, no vacancy or market-timing effects.
These simplifications keep the model transparent and reproducible. For the plain-language version, read how the rent vs buy math works; for term definitions, see the glossary.
Sources & references
Primary, authoritative references for the data, rules, and conventions behind our calculators and guides.
- Owning a Home: mortgage process and costs — U.S. Consumer Financial Protection Bureau (CFPB)
- What is private mortgage insurance (PMI)? — U.S. Consumer Financial Protection Bureau (CFPB)
- Understand closing costs and the Loan Estimate — U.S. Consumer Financial Protection Bureau (CFPB)
- Primary Mortgage Market Survey (mortgage rate history) — Freddie Mac
- 30-Year Fixed Rate Mortgage Average (MORTGAGE30US) — Federal Reserve Bank of St. Louis (FRED)
- House Price Index (long-run home-price growth) — U.S. Federal Housing Finance Agency (FHFA)
- Publication 936: Home Mortgage Interest Deduction — U.S. Internal Revenue Service (IRS)
- Topic No. 503: Deductible Taxes (state and local / SALT cap) — U.S. Internal Revenue Service (IRS)
- Consumer Price Index (inflation) — U.S. Bureau of Labor Statistics (BLS)