Mortgage
Rent vs Buy: Should I Rent or Buy a House?
Renting or buying is one of the biggest money choices most people make. The right answer depends on prices where you live, how long you plan to stay and what you would do with the money otherwise. The 5% rule is a quick way to start comparing — then the [Rent vs Buy Calculator](/calculators/rent-vs-buy-calculator) lets you test your own numbers.
By the MoneyTools Editorial TeamLast updated 7 min readEditorial Policy
What you really pay when you rent or buy
When you rent, almost all of your rent is a cost you do not get back. When you buy, part of your monthly payment builds equity, but other costs are also lost money. These are called unrecoverable costs, and comparing them is the fairest way to judge renting against buying.
- Renting: rent and renter's insurance.
- Buying: property tax, maintenance, homeowner's insurance, mortgage interest, and the return you give up by putting your down payment into the house instead of investing it.
- One-time buying costs: closing costs when you buy and agent and transfer costs when you sell.
The 5% rule explained
The 5% rule is a shortcut for the yearly unrecoverable cost of owning. It adds up three rough parts:
Yearly owning cost ≈ Home price × 5% Break-even monthly rent ≈ Home price × 5% ÷ 12
- 1%
- Property tax (varies widely by state and county)
- 1%
- Maintenance and repairs
- 3%
- Cost of capital — mortgage interest plus the return your down payment could have earned
If your rent is below the break-even figure, renting is likely cheaper. If it is above, buying may be cheaper. It is a rule of thumb, not a precise answer: your tax rate, interest rate and home's age can move each part up or down.
Worked example: $2,000 rent vs a $350,000 house
Worked example
Applying the 5% rule
- Home price: $350,000
- Yearly unrecoverable cost: $350,000 × 5% = $17,500
- Monthly equivalent: $17,500 ÷ 12 ≈ $1,458
- Your rent for a similar home: $2,000 a month
- Difference: $2,000 − $1,458 ≈ $542 a month in favor of buying
By the 5% rule alone, buying looks about $542 a month cheaper — before counting the one-time costs of buying and selling.
5-year cost comparison
Now add the one-time costs. This table assumes rent rises 3% a year, owning costs stay at the 5% rule, closing costs of 3% ($10,500) when you buy and selling costs of 6% ($21,000) when you leave. All numbers are illustrative.
| Year | Rent paid (cumulative) | Owning cost (cumulative, 5% rule) | Owning incl. buy + sell costs |
|---|---|---|---|
| 1 | $24,000 | $17,500 | $49,000 |
| 2 | $48,720 | $35,000 | $66,500 |
| 3 | $74,182 | $52,500 | $84,000 |
| 4 | $100,407 | $70,000 | $101,500 |
| 5 | $127,419 | $87,500 | $119,000 |
In this example, renting costs less if you move within about four years. Around year four or five, buying catches up and then pulls ahead, because rent keeps rising while the one-time costs are already paid. If the home's value rises, buying looks better; if it falls, renting looks better.
Home values, rent increases and interest rates here are made-up examples. Use local prices and your own loan quote.
Other things to weigh
How long you will stay
This is often the deciding factor. Plan to stay at least five years before buying makes sense in most cases.
Your down payment and emergency fund
Buying with no savings left over is risky — a roof repair or job loss can hit hard. Check your cushion with the Emergency Fund Calculator.
What you can afford
A rule saying buying is cheaper does not mean you can afford it. See How Much House Can I Afford? and run the Mortgage Calculator for the full monthly payment.
Flexibility
Renting makes it easy to move for a new job. Owning gives stability and control over your space. Neither has a dollar value, but both matter.
Run your own rent vs buy numbers
- Find the price of a home similar to the one you rent.
- Multiply by 5% and divide by 12 for a quick break-even rent.
- Enter your rent, home price, down payment, rate and how long you plan to stay in the Rent vs Buy Calculator for a fuller comparison.
Run your own numbers
Compare the long-term cost of renting versus buying a home.
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Should I Refinance? How to Calculate Your Break-Even Point
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