Renting vs Buying: The Real Math

The conventional wisdom says buying a home is always better than renting because you're "building equity instead of throwing money away." That's a dramatic oversimplification that ignores some important math.

When you buy a home, your money goes to several places: principal (equity), interest (not equity), property taxes (not equity), insurance (not equity), maintenance (not equity), and potentially PMI and HOA fees. In the early years of a 30-year mortgage, roughly 70-80% of your payment goes to interest — not equity.

Meanwhile, if you rent and invest the difference (what you would have spent on a down payment, closing costs, maintenance, and the premium of owning over renting), that invested money grows through compound interest.

A worked example

Consider a $350,000 home with a $70,000 down payment (20%). At a 6.5% rate on a 30-year loan, your monthly payment for principal and interest alone is about $1,770. Add property taxes ($350/month), insurance ($125/month), and maintenance ($290/month), and you're looking at roughly $2,535 per month in total housing costs.

If you could rent a comparable home for $1,800 per month and invest that $70,000 down payment plus the $735 monthly savings at a 7% annual return, after 10 years you'd have roughly $215,000 in investments. Meanwhile, your home equity after 10 years would be about $128,000 (assuming 3% annual appreciation).

The breakeven point — where buying becomes cheaper than renting — depends heavily on how long you stay, local appreciation rates, rent growth, and investment returns. In many markets, you need to stay 5-7 years just to break even after accounting for transaction costs.

When renting makes more sense

Renting often wins when you plan to move within 5 years, when home prices are high relative to rents (high price-to-rent ratios), when you can invest the savings at reasonable returns, or when you value flexibility and mobility. There's no shame in renting — it's a legitimate financial strategy, not a consolation prize.