Understanding Rent vs Buy
Real-world scenario: Rent $2,000; home $400k; 20% down; 6.5% / 30yr; ownership 1.5%/yr; 5 years.
What is Rent vs Buy?
An educational cash-out comparison. It ignores tax deductions, appreciation, selling costs, and opportunity cost of the down payment unless you fold them into inputs.
- Cash focus — not net worth / equity
- Ownership % — taxes + insurance + maintenance as % of price per year
- Horizon matters — short stays often favor renting on cash
The Formula
Worked Example
Common Use Cases
- Move horizon: 3 vs 7 years
- Down-payment stress: 10% vs 20%
- High-rent cities: when rent ≈ ownership payment
Pro Tips
- Add HOA into ownership %
- This tool does not credit equity
- Compare after-tax with a professional if material
Limitations: Rent vs Buy results are educational finance aids—not tax, lending, investment, or legal advice. Confirm figures with payroll, lenders, plan administrators, and qualified professionals.
FAQ
Why ignore home equity?
Cash gap answers “what left my bank account?” Equity is a separate balance-sheet outcome. Pair with remaining-balance / equity tools for a fuller picture.
What ownership % should I use?
A common starting point is 1–2% of home value per year covering property tax, insurance, and maintenance—adjust to your market.
Authoritative References
For consumer finance education, consult:
- CFPB — mortgages, credit cards, and consumer lending
- IRS retirement plans — 401(k) limits and rules
- Investopedia — payoff and mortgage explainers