Rent vs. Buy Calculator

Should I rent or buy?

This is the all-important, life-changing question every potential homeowner will face. For our Rent vs. Buy Calculator, we evaluate the decision from a purely financial standpoint. We base the calculations on many assumptions, such as constant home value appreciation rates and constant rental fee increases rates in the future. We assume the user can afford to either buy or rent. We strive to give users the best results possible. However, because our calculator cannot precisely predict the future, the result is an estimate based on input values only.

What to Expect When Buying a Home

Owning a home includes some one-time transaction costs and recurring maintenance costs. The former mainly refers to the costs associated with buying and selling the house, such as the down payment, closing costs, and commission fees. After adding such expenses, the cost of buying and selling a house can be very high, often reaching 10% or more of the home's value.

The recurring maintenance costs mainly refer to the four most significant costs associated with homeownership called PITI, an acronym standing for principal, interest, taxes, and insurance.

• P - Principal: The amount borrowed from the lender that builds equity
• I - Interest: The cost of borrowing money (tax-deductible)
• T - Taxes: Annual property taxes (typically 1-3% of home value)
• I - Insurance: Homeowners insurance (PMI required for down payment less than 20%)

What to Know When Renting

Rent is the act of paying a landlord for the right of use on a residential property. The primary cost of renting a home is the monthly rental fee. Other costs include the security deposit, application fee, and possibly, insurance.

A rental home is typically considered a temporary residence. Its main advantage is the flexibility of negotiable lease terms, which generally range from a few months to a few years. Therefore, it makes sense for those with an uncertain future to rent instead of buy.

Major Factors That Impact the Decision

• Average Investment Return (AIR): The opportunity cost of using cash for a down payment instead of investing
• Home Appreciation Rate: How much the home value increases over time (typically 3-5% per year)
• Mortgage Interest Rate: The cost of borrowing money for the home purchase
• Length of Stay: The most critical variable - the longer you stay, the more buying makes sense

General Rule of Thumb

As a general rule of thumb, the longer the intended stay, the more it makes sense (financially) to buy. Otherwise, one should consider renting. Typically, owning a house involves significant one-time buying or selling costs. If one stays in a house long enough, it justifies the massive buying and selling costs and makes the average total monthly cost of owning a home lower than renting.