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Financial Comparison of Renting Versus Buying a Home

Financial Comparison of Renting Versus Buying a Home

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

    There are a lot of factors that go into deciding if you should rent or buy a home. Some are personal such as how much you value housing flexibility as compared to certainty and control. Other considerations are financial such as how the cost or renting a home compares to the cost of owning. Buying a home involves a greater financial commitment including your down payment and closing costs and additional ongoing expenses such as property tax, homeowners insurance, property maintenance and upkeep and other housing expenses.

    Evaluating the renting versus buying on a financial basis can also be challenging because your housing expenses can change over time. For example, your monthly rent payment usually increases over time as compared to a fixed rate mortgage payment that remains constant. Or your mortgage tax deduction benefit decreases over time as you pay less interest expense as you pay down your loan balance.  So while you may benefit financially from renting today, looking out over several years may suggest that owning a home is more rewarding.

  • Rent Versus Buy Financial Comparison
  • The example presented in the chart below takes these changes into account and provides a financial comparison of renting versus buying a home over a ten year period.  In many cases when analyzed over a short period of time – one or two years – renting a home can save a person money on a monthly basis when compared to buying a home.  However, when you factor in increases in rent over time as compared to a fixed loan payment, as well as the mortgage tax benefit, in the medium or long term, buying a home can make more sense financially and save you money on a monthly basis as compared to renting.

    The example compares the cost of a 30 year fixed rate loan with a 4.0% mortgage rate to rent payments that increase annually. The example shows renting and buying a home on both a monthly and an annual basis over a period of ten years to account for changes in rents and other inputs. The comparison includes property tax and homeowners insurance expenses, which are extra costs only homeowners pay as well as the mortgage tax deduction, which is only available to homeowners.

    From a financial standpoint it is important to not only compare your rent to your mortgage payment but to compare your rent to total monthly housing expense which includes property tax and homeowners insurance in addition to other housing-related costs. This is a more accurate approach to compare renting and buying financially because monthly housing expense reflects the total cost of owning a home and not just your mortgage payment.

    In the example, renting is less expense than buying in year one but when you factor in rent increases, by the second year the monthly rental payment is more than the mortgage payment.  The example shows the benefits of having a fixed rate mortgage, with an interest rate and monthly payment that do not change over the life of the loan, as compared to paying increasing monthly rent over time.  By year three, total monthly housing expense is less expensive than renting when you factor in the mortgage tax deduction benefit.  In year ten, the financial benefits of owning a home are substantial on both a monthly and annual basis mostly because the rent has increase significantly as compared to the mortgage payment which remains constant.

    The chart represents one specific example and your personal rent versus buy financial analysis varies depending on your monthly rent payment and future rent increases, your mortgage size and type as well as your personal income tax rate and the property tax rate in your area.  The mortgage rate is another very important factor in the analysis because the higher the rate, the more expensive buying is as compared to renting. 

    The comparison also focuses on the monthly cost of renting versus buying and does not reflect changes in property value which can provide tremendous financial benefit, and risk, to homeowners. Forecasting changes in home prices can be highly challenging, however, so to be conservative in your evaluation you should consider property appreciation financial upside.

  • CalculatorUse our BUY VERSUS RENT COMPARISON CALCULATOR to determine if buying or renting a home makes financial sense for you
  • Finally, it is important to emphasize that the financial analysis is only one component to determining if you should rent or buy a home.  There are many non-financial considerations such as housing flexibility, lifestyle, risk tolerance, employment stability and family situation that may be more important inputs to your decision making process.  Additionally, as the comparison below illustrates, the financial impact of renting versus buying changes over time so a lot depends on how long you plan to live in the home.

    For example, if you are planning on expanding your family in the next couple of years then renting may make more sense in the near term. That way you can avoid paying closing costs twice and you can save for a larger down payment. But if you have established roots in a community and know you want to live there for many years, then buying a home is likely your best option. Review the example below to understand the financial comparison of renting versus buying and then determine the option that best fits both your financial and personal objectives.

  • Year
  • Monthly Rent Payment
  • Monthly Mortgage Payment
  • Monthly Difference Between Rent and Mortgage Payment
  • Annual Difference Between Rent and Mortgage Payment
  • Monthly Property Tax and Insurance
  • Total Monthly Housing Expense (MHE)
  • Monthly Difference Between Rent and MHE
  • Annual Difference Between Rent and MHE
  • Monthly Tax Deduction Benefit
  • MHE Less Tax Deduction Benefit
  • Monthly Difference Between Rent and MHE + Tax Benefit
  • Annual Difference Between Rent and MHE + Tax Benefit
  • 1
  • $1,800
  • $1,820
  • ($20)
  • ($240)
  • $480
  • $2,300
  • ($500)
  • ($6,000)
  • $330
  • $1,970
  • ($170)
  • ($2,040)
  • 2
  • 1,890
  • 1,820
  • 70
  • 840
  • 480
  • 2,300
  • (410)
  • (4,920)
  • 325
  • 1,975
  • (85)
  • (1,015)
  • 3
  • 1,985
  • 1,820
  • 165
  • 1,974
  • 480
  • 2,300
  • (316)
  • (3,786)
  • 371
  • 1,979
  • 5
  • 65
  • 4
  • 2,084
  • 1,820
  • 264
  • 3,165
  • 480
  • 2,300
  • (216)
  • (2,595)
  • 316
  • 1,984
  • 100
  • 1,202
  • 5
  • 2,188
  • 1,820
  • 368
  • 4,415
  • 480
  • 2,300
  • (112)
  • (1,345)
  • 312
  • 1,988
  • 200
  • 2,399
  • 6
  • 2,297
  • 1,820
  • 477
  • 5,728
  • 480
  • 2,300
  • (3)
  • (32)
  • 308
  • 1,992
  • 305
  • 3,660
  • 7
  • 2,412
  • 1,820
  • 592
  • 7,106
  • 480
  • 2,300
  • 112
  • 1,346
  • 303
  • 1,997
  • 416
  • 4,987
  • 8
  • 2,533
  • 1,820
  • 713
  • 8,553
  • 480
  • 2,300
  • 233
  • 2,793
  • 299
  • 2,001
  • 532
  • 6,384
  • 9
  • 2,659
  • 1,820
  • 839
  • 10,073
  • 480
  • 2,300
  • 359
  • 4,313
  • 295
  • 2,005
  • 654
  • 7,854
  • 10
  • 2,792
  • 1,820
  • 972
  • 11,669
  • 480
  • 2,300
  • 492
  • 5,909
  • 291
  • 2,009
  • 783
  • 9,400
Monthly rent increases 5% per year
Reflects $380,000 fixed rate mortgage with 4% interest rate
Difference between monthly rent payment and mortgage payment
Difference between rent and mortgage payment over the course of the year
Mothly housing expenses that renters do not have to pay
Mortgage payment plus property taxes and homeowners insurance
Difference between monthly rent and total monthly housing expense
Difference between rent and total monthly housing expense over the course of the year
Monthly benefit from interest expense income tax deduction. Declines slightly over time
Monthly housing expense less tax deduction benefit
Difference Between Rent and monthly housing expense less tax deduction benefit
Difference between monthly rent and monthly housing expense less tax deduction benefit over the course of the year

    If you are thinking about buying a home, we recommend that you compare quotes for several lenders to find the best mortgage terms.  Contact multiple lenders in the table below to request loan terms and learn more about the programs they offer.  Shopping for your mortgage enables you to find the lender and loan that best meet your needs.

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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.
  • Learn more about the decision to buy or rent by watching the video tutorial below.

  • FREEandCLEAR Mortgage Instructional Video

    Should I Rent or Buy? Instructional Video

  • Sources

    Rent Versus Buy Financial Considerations: https://www.consumerfinance.gov/ask-cfpb/what-are-some-of-the-financial-considerations-when-thinking-about-buying-or-renting-a-home-en-119/

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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