Is it cheaper to rent or buy right now?

Almost every version of this question gets asked the same way: my rent is $2,200 and the mortgage payment would be $2,400, so buying costs me $200 more. That comparison is missing about half the picture, and the half it is missing runs in both directions.

Why a payment is not a cost

A mortgage payment is not money spent the way rent is money spent. Part of it reduces what you owe, and that part comes back to you when you sell. Early in a 30-year loan it is a small part — often under 20% of the payment — but it is not zero, and it grows every month.

Running the other way are the costs a renter simply does not have:

• Property tax, which continues forever and rises with assessments.
• Homeowners insurance, which has moved sharply in a lot of states.
• Maintenance, which averages out to something real even in years when nothing happens.
• Major replacements — roof, HVAC, water heater — that arrive on their own schedule.
• The cost of the down payment, which is money not invested elsewhere.
• Transaction costs, which are the big one and the one most often ignored.

Buying and selling a house costs several percent of the price each way. On a $400,000 home that is tens of thousands of dollars, paid twice, that a renter never pays at all.

The answer is a year, not a verdict

Because the transaction costs land at the start and the equity builds slowly, buying starts far behind and catches up over time. So the useful output is not "renting is cheaper" or "buying is cheaper". It is: how many years do you have to stay before buying pulls ahead?

Under that break-even, renting wins, sometimes by a lot. Past it, buying generally wins and keeps winning. The rent versus buy calculator puts both paths on the same timeline and marks the crossing point.

Two things move that year more than anything else, and neither is the interest rate:

• How fast the home appreciates, and
• What the money you did not spend on a down payment would have earned.

Both are assumptions, not facts. Small changes in either swing the break-even by years, which is why anyone who gives you a confident single-number answer is telling you about their assumptions rather than about your situation. Run it twice — once optimistic, once pessimistic — and see whether the answer changes.

What you keep on the way out

The exit is where owning has an advantage that rarely gets mentioned, and it is a large one.

Under Section 121 of the tax code, when you sell your main home you can exclude up to $250,000 of gain from income if you file single, or $500,000 if you are married filing jointly. To qualify you must have owned the home for at least 24 months out of the five years ending on the sale date, and lived in it as your residence for at least 24 months out of those same five years. The two periods do not have to be the same 24 months. You generally cannot use the exclusion if you already excluded gain from another home sale within the previous two years.

Note the shape of the rule: it rewards staying. Two years is the floor, and the transaction costs mean the real floor is usually longer than that.

What to ask yourself

• How long do I actually expect to be here? Not how long I hope — how long the job, the relationship and the schools realistically say. If the honest answer is under five years, the numbers rarely favor buying.
• What would the down payment be doing instead? If the answer is sitting in checking, the opportunity cost is small. If it is invested, it is not.
• Can I absorb a $12,000 surprise? Renters call the landlord. Owners call a contractor.
• Am I comparing like with like? The house you would buy is usually not the apartment you rent. If you are buying more space, some of the extra cost is buying more space, not buying versus renting.

There is no universal answer here, and anyone selling one has something to sell. There is a break-even year for your numbers, and it either falls inside your horizon or it does not.

Sources: IRS Topic No. 701, Sale of your home, for the Section 121 exclusion amounts and the ownership and use tests.