Buy vs Rent Game: Which Choice Saves You More?

Inputs: Rent, Buy, and Growth Assumptions

A rent vs. buy simulation typically requires you to enter the key numbers that drive the comparison. On your side, you'll input the home price, down payment, mortgage rate, and loan term for buying, along with the monthly rent and expected rent growth for renting. You'll also need to specify how long you plan to stay in the home, since the break-even point depends heavily on your time horizon.

For the simulation to be useful, you must also make assumptions about the future: home appreciation, rent growth, investment returns on money saved by renting, and inflation. These assumptions are rarely known with certainty, but they allow you to test different scenarios. For example, one commonly used assumption is a home appreciation rate of 4% per year, based on the 30-year average of the S&P/Case-Shiller U.S. National Home Price Index.

You can also adjust for property taxes, homeowners insurance, maintenance costs, and possibly HOA fees, all of which are part of the real cost of owning. Some simulations include PMI when your down payment is less than 20%, and they may also factor in tax benefits from deducting mortgage interest and property taxes.

• Home price, down payment, mortgage rate, and loan term
• Monthly rent and expected rent growth
• Planned length of stay in the home
• Home appreciation rate
• Property tax rate, insurance rate, maintenance percentage, and HOA fees
• PMI if applicable
• Investment return on money saved by renting
• Tax assumptions

Sources: NerdWallet, Fidelity Investments

How to Interpret the Results

The primary output of a rent vs. buy simulation is a comparison of the total cost of renting versus buying over your planned stay. Some calculators show a simple positive or negative result: positive if buying is lower-cost, negative if renting is lower-cost. Others display a break-even horizon—the point at which buying becomes cheaper than renting—such as Zillow's calculator example that showed 'After 5 years and 10 months, buying will be cheaper than renting'.

Remember that the result is only as good as the inputs and assumptions you provide. If you change the expected home appreciation or the investment return on your savings, the outcome can flip. Therefore, it's important to run several scenarios with different assumptions to understand the range of possibilities, rather than relying on a single result.

Also keep in mind that the simulation is a financial comparison. It does not capture non-financial factors like the flexibility of renting, the pride of homeownership, or the emotional satisfaction of owning your own place. Use the numbers as one input into your decision, not the sole determinant.

Sources: Lower Mortgage, Zillow

Key Cost Components of Buying vs Renting

To make a fair comparison, you need to account for all the costs associated with each option. Renting is fairly straightforward: you pay the rent, and you may be responsible for utilities and renters insurance. Buying is more complex because it includes a mortgage payment (principal and interest), property taxes, homeowners insurance, maintenance, HOA fees, and potential transaction costs.

The mortgage payment is made up of principal and interest. Only the principal portion builds equity; the interest is a pure cost. In the early years of a 30-year fixed-rate mortgage, interest can account for 70% to 80% of the total payment.

Beyond the mortgage payment, homeownership carries additional costs. Property taxes average around 1.1% of assessed home value in the United States, but they vary by locality, from 0.28% in Hawaii to over 2.2% in New Jersey. Maintenance typically runs 1% to 4% of a home's value annually. Homeowners insurance and HOA fees can also add up. If your down payment is less than 20%, you'll likely need PMI, which typically adds 0.5% to 1% of the loan amount annually.

When you buy and sell, you also incur transaction costs: closing costs typically run 2% to 5% of the purchase price, and real estate agent commissions typically add another 5% to 6% of the sale price.

• Renting: rent, utilities, renters insurance
• Buying: mortgage payment (principal + interest), property taxes, homeowners insurance, maintenance, HOA fees, PMI, closing costs, selling costs

Sources: NerdWallet, Fidelity Investments, PennyMac, Calculator.net

When Buying Makes Sense

Buying a home can be a good financial decision if you plan to stay for a long time, can afford the upfront costs, and want to build equity. The longer your time horizon, the more you can spread out the transaction costs and the more time you have to build equity and benefit from appreciation.

If you can comfortably handle the mortgage payment and the additional costs of homeownership, buying can provide a sense of stability and control. You have the freedom to customize your home, and you can benefit from potential tax advantages, such as deducting mortgage interest and property taxes.

Sources: Fidelity Investments, WOWA.ca, Calculator.net

When Renting Makes Sense

Renting is often the better choice if you value flexibility, have a short time horizon, or cannot easily afford the upfront costs of buying. Renting typically requires only a security deposit and the first month's rent. You are not responsible for major maintenance, and you can relocate more easily without incurring large costs.

If the price-to-rent ratio in your area is high (say, above 20), renting may be more financially prudent. Also, if you can invest the money you would have used for a down payment and the ongoing savings from renting, you might come out ahead, depending on market returns.

Sources: Fidelity Investments, WOWA.ca

the Simulation

Simulations are based on assumptions that may not reflect current or local market conditions. Home appreciation, rent growth, and investment returns are uncertain, and the future may differ from historical averages. The specific numbers used in calculators, such as a 4% appreciation rate or a 6% investment return, are illustrative assumptions, not guarantees.

Also, simulations typically do not capture all the qualitative aspects of the decision, such as your personal preferences, lifestyle, and risk tolerance. They are designed to provide a financial comparison, but the final decision should consider both financial and non-financial factors. Remember that the simulation is an educational tool, not financial advice. It should not be used to make a personalized buy/rent decision without consulting a qualified professional.

Sources: Fidelity Investments

Side-by-side Category and Decision-Criteria Matrix

To help you weigh the trade-offs, the following table summarizes the key categories where renting and buying differ. Use this as a starting point for your own comparison, and adjust the weights to match your priorities.

Sources: WOWA.ca