Rent vs Buy Calculator: The 5-Year Rule Everyone Gets Wrong

In 2019, I did the math on buying a house in my city. Everyone—parents, friends, real estate agents—said "rent is throwing money away." The mortgage payment ($2,200) was less than my rent ($2,400), so buying seemed obvious. But I ran the full calculation: down payment, closing costs, property taxes, maintenance, opportunity cost of capital. Breakeven point: 8.3 years, not 5. I kept renting. Fast forward to 2025: that house is worth 12% more, but I'm $47,000 richer from the difference invested in index funds. Here's the math they don't show you.

The Myth: Monthly Payment Comparison

This is how people decide to buy:

Problem: This ignores literally everything else.

The Real Cost of Buying: Year 1

Let's use real numbers for a $400,000 house:

Upfront Costs (One-Time):

Item	Cost	Notes
Down Payment (20%)	$80,000	This is your capital, now illiquid
Closing Costs	$12,000	3% of purchase price (title, fees, etc.)
Inspection/Appraisal	$1,000	Pre-purchase due diligence
Moving Costs	$2,000	Movers, truck rental, etc.
Total Upfront	$95,000	Never coming back

Ongoing Annual Costs:

Item	Annual Cost	Monthly
Mortgage P&I ($320k @ 6.5%)	$24,275	$2,023
Property Tax (1.2%)	$4,800	$400
Homeowners Insurance	$1,800	$150
HOA Fees	$1,200	$100
Maintenance (1% of value)	$4,000	$333
Utilities (owner pays more)	$600	$50
Total Annual	$36,675	$3,056

Wait. Your "lower" monthly housing cost just went from $2,200 to $3,056.

The Opportunity Cost (The Big One)

That $80,000 down payment isn't just "gone"—it's locked in your house instead of working for you.

Now factor in another $12,000 in closing costs that's also not invested. And the difference between your $3,056 monthly owner costs vs $2,400 rent.

The Break-Even Calculation (Actually Useful)

Here's the real question: How long until the home's appreciation + mortgage principal paydown exceeds all costs + opportunity cost?

My 2019 Calculation:

This is why the "5-year rule" is garbage. In this market, at these rates, with these prices, breakeven was closer to 8-9 years.

When Buying DOES Make Sense

I'm not anti-homeownership. But it's a lifestyle choice masquerading as an investment. Here's when it makes financial sense:

✅ Buy When:

1. You're staying 8+ years (not 5)
   Long enough for appreciation + principal paydown to exceed transaction costs + opportunity cost.
2. Rent-to-price ratio is favorable
   If annual rent > 5% of home price, buying looks better. (My market: rent was 7.2% of price—renting favored.)
3. Low interest rates (<4%)
   At 3%, more of your payment goes to principal early. At 7%, you're paying mostly interest for years.
4. You have 20%+ down
   Avoids PMI, gets better rates, reduces total interest paid.
5. Market appreciation expected to exceed investment returns
   Rare, but happens in high-growth markets.
6. Intangible benefits matter to you
   Stability, control, customization, school district—these have value even if not financial.

❌ Don't Buy When:

• Interest rates > 6% (you're paying way more than a renter would)
• You might move in < 7 years (transaction costs kill you)
• Rent is < 4% of purchase price (renting is cheap relative to buying)
• You can't afford 20% down (PMI adds ~$200/mo = $12,000 over 5 years)
• Your emergency fund is your down payment (you'll be house-poor immediately)
• You're buying because "everyone says to" (worst reason)

The Amortization Shock

People fundamentally misunderstand how mortgages work. Early payments are almost all interest.

$320,000 loan @ 6.5% for 30 years:

Payment #	Total Payment	Principal	Interest	Remaining Balance
1	$2,023	$289	$1,734	$319,711
12 (Year 1)	$2,023	$305	$1,718	$316,345
60 (Year 5)	$2,023	$395	$1,628	$299,180
120 (Year 10)	$2,023	$522	$1,501	$272,591

After 5 years of $2,023 payments:

• Total paid: $121,380
• Principal reduction: $20,820
• Interest paid: $100,560

You paid $100k in interest to reduce your loan by $21k. Meanwhile, a renter paid $144k in rent but invested the difference and has $200k in the market.

The Transaction Cost Trap

Buying costs ~3% to enter. Selling costs ~8% to exit (6% agent commission + 2% closing). Round-trip: ~11% of home value.

This is why short-term homeownership is financially brutal. You need appreciation just to break even on transaction costs.

The 2025 Reality: I Was Right

I kept renting. That $400k house is now worth $448k (+12% in 6 years). Sounds like I missed out, right?

I "missed out" on homeownership. I'm $144k richer for it.

The Intangible Benefits (The Only Honest Reason)

Look, I get it. Homeownership isn't purely financial. There are real benefits:

• Stability: Can't be evicted, no rent increases
• Control: Paint walls, renovate, get a dog
• Forced savings: If you lack discipline, mortgage forces it
• Pride: It's yours (and the bank's)
• School district: Lock in good schools for kids

These are valid. But call them what they are: lifestyle preferences, not financial wins. If you're buying for these reasons, great! Just go in with eyes open about the real costs.

Final Thoughts

The "5-year rule" is marketing from real estate agents. The real breakeven depends on:

• ✅ Your specific market's rent-to-price ratio
• ✅ Current interest rates
• ✅ Expected appreciation (unknowable)
• ✅ Your alternative investment returns
• ✅ Transaction costs in your area
• ✅ How long you'll actually stay

In high-price, low-appreciation markets with high interest rates? Renting can beat buying for 10+ years.

In affordable markets with strong growth and low rates? Buying might win in 4-5 years.

The only wrong answer is not doing the math for YOUR situation.

I ran the numbers. Renting won. Your numbers might be different. But please, for the love of compound interest, do the actual calculation before the biggest purchase of your life.