Comparing a monthly rent with a monthly mortgage payment is misleading: a big part of the mortgage payment is principal (savings), and owning has costs a renter never sees. The 5% rule is a quick way to compare like with like.
The rule
Estimate the unrecoverable cost of owning as about 5% of the home's value a year:
- ~1% property tax (varies a lot by area),
- ~1% maintenance,
- ~3% cost of capital: mortgage interest plus the return your down payment could have earned elsewhere.
Example
Home price $400,000. 5% = $20,000 a year, about $1,667 a month.
- If a comparable home rents for less than about $1,667, renting is likely cheaper in pure cost terms.
- If rent is well above that, buying likely wins, assuming you stay long enough.
Adjust it for your situation
- Higher mortgage rates raise the 3% part. At 7% interest and an expected 5% investment return, 4% may be more realistic, making the threshold closer to 6%.
- High property tax areas can add another 1%.
- Buying and selling costs (often 6% to 10% combined) mean owning usually needs at least 5 years to pay off.
Beyond the math
Owning gives stability and control; renting gives flexibility and no surprise repair bills. The rule only tells you which is cheaper, so treat it as a starting point and then run a full rent-vs-buy comparison with your own numbers.
Free tools
- Rent vs buy calculator: https://smartbudgetsheets.surge.sh/calculators/rent-vs-buy-calculator/?utm_source=mataroa
- How much house can I afford: https://smartbudgetsheets.surge.sh/calculators/how-much-house-can-i-afford-calculator/?utm_source=mataroa
- Rent affordability calculator: https://smartbudgetsheets.surge.sh/calculators/rent-affordability-calculator/?utm_source=mataroa
- Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=mataroa
- 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=mataroa
General information, not financial advice. Figures are rounded examples.