Rent vs buy: how to compare them fairly
A mortgage payment close to your rent does not mean buying wins, and rent is not "throwing money away". How to compare the two so the answer means something, where FHA loans fit in, and what moves the result most.
The usual case for buying: "the mortgage is about the same as my rent, and at the end the home is mine." The usual case for renting: "I'm not tying myself down for 30 years." Both miss what actually decides it: how much money each path leaves you with after the years you stay, for the same spending out of pocket.
You can run your own numbers in the rent vs buy calculator. Here is what it compares and why.
Compare net worth, not payments
The payment is only part of owning. A buyer pays a down payment and closing costs up front, then the mortgage, property tax, insurance, maintenance and any HOA dues every month, and an agent's commission when selling.
A renter pays none of that. So a fair comparison assumes the renter invests the difference instead of spending it. The down payment they did not make gets invested. When their rent is lower than the monthly cost of owning, they invest that gap too. When rent is higher, the buyer invests it.
After the years you plan to stay, compare:
- the buyer: home value after selling costs, minus the mortgage left, plus what they invested,
- the renter: everything they invested, with returns.
An example
A $400,000 home, 10% down, a 6.5% 30-year mortgage. The payment is $2,275, and with ownership costs of 2% of the value a year, owning costs $2,960 a month at the start. A comparable rental is $2,200. Home prices and rents grow 3% a year, and invested money earns 6%.
With these numbers renting is ahead for the first seven years and buying pulls ahead in year 8. Stay three years and the renter is about $26,000 better off; stay fifteen and the buyer is about $72,000 ahead. The closing and selling costs, around 9% of the price in total, need years to pay back.
This is not a forecast for your market. Change one assumption and the answer can flip, which is the point of running your own numbers.
Where FHA loans fit in
FHA loans let you buy with 3.5% down if your credit score is 580 or higher (10% down with a score of 500 to 579). The trade-off is mortgage insurance: an upfront premium of 1.75% of the loan, usually rolled into it, and an annual premium, 0.55% of the loan for most 30-year loans. With less than 10% down, the annual premium stays for the life of the loan; with 10% or more, it ends after 11 years.
To model an FHA loan in the calculator, set the down payment to 3.5% and add the annual premium to the ownership costs. In the example above that pushes the break-even year from 8 to 15: a smaller down payment means a bigger loan, more interest and insurance on top.
What moves the result most
How long you stay. Buying and selling costs are paid once. Over a short stay, they eat everything the home gains in value.
Home price growth vs investment returns. The buyer bets on the home, with the leverage of the mortgage; the renter bets on what they invest. If homes grow slower than investments earn, renting catches up.
The mortgage rate. Every point is hundreds of dollars a month that a renter would invest instead.
Whether the difference really gets invested. The comparison assumes the renter saves the gap. If it would get spent, renting only wins on paper. A mortgage works as forced saving, and that is a real advantage.
The rent at which it breaks even
The calculator also shows the rent at which both paths end even. It is the quickest test for a listing: if a comparable place rents for less, renting wins on your assumptions; if it rents for more, buying does. In the example, that rent is about $2,250.
What the calculator leaves out
- Taxes: no mortgage interest deduction (most people take the standard deduction anyway) and no tax on investment gains.
- Rate changes: the mortgage is fixed-rate for the whole term.
- PMI on conventional loans: put it in ownership costs if you put down less than 20%.
A planning figure, not advice. But better than "the payment is about the same as rent".
Send it to someone
Every calculation has its own link with your numbers. Copy it from under the form and send it to your partner or your lender, and they see exactly what you see. If you share a place and need to divide the rent, try the split rent calculator.
Once you've decided, you can track the rent or the mortgage and every home cost in Ordiarion, and see whether reality matches the assumptions.