Rent is $1,800. Owning costs $2,472, plus $39,000 to start.
The story so far A few years into your career, you earn $8,000 a month before taxes and rent a 2-bedroom for $1,800. A friend says, "Stop throwing money away on rent. Buy!" A similar house down the street costs $300,000. To buy it you'd need $30,000 down and about $9,000 in closing costs. Then each month: the mortgage, property tax, insurance and repairs, about $2,472. Is your friend right? This lesson shows what owning really costs, what you get back, and how to tell when buying beats renting.
Most people buy a home with a mortgage: a loan, usually for 30 years, where the house itself is the collateral.
A home is the biggest purchase most people ever make. Owners build wealth as they pay down the loan, but owning has big costs renters never see.
Add up the full monthly cost, keep it under 28% of income, have the cash to start, and plan to stay at least about 5 years.
Mortgage loan officers approve home loans. Real estate agents help people buy and sell. Appraisers estimate what a home is worth. Underwriters check that the loan is safe.
What you're looking at: what renting and owning cost you each month, drawn to scale. Renting is one block: $1,800. Owning stacks five: the mortgage payment $1,662, property tax $275, homeowners insurance $150, PMI $135 and upkeep $250, about $2,472 in all.
Owning a home, piece by piece.
"Rent is throwing money away" is only half true. Owners throw some money away too: interest, taxes, insurance and repairs. Here's every piece, so you can compare fairly.
The mortgage
A mortgage is a home loan, usually for 30 years. Each payment has two parts: interest to the lender, and principal, which pays down what you owe. At the start, most of each payment is interest, just like the car loan in Lesson 4.3. Your credit score (Lesson 4.1) sets your rate.
- The loan
- $300,000 − $30,000 down = $270,000 at 6.25% for 30 years: $1,662.44 a month.
- Your first payment
- $1,406.25 interest + $256.19 principal. Only $256.19 is yours to keep.
- Over 30 years
- $1,662.44 × 360 − $270,000 = $328,478.40 of interest, more than the loan.
The cash to start
You need a down payment plus closing costs, often 2% to 5% of the price. Put down less than 20% and most lenders add PMI, private mortgage insurance, which protects the lender, not you.
- Down payment
- $300,000 × 0.10 = $30,000. That's under 20%, so you pay PMI: $135 a month.
- Closing costs
- $300,000 × 0.03 = $9,000.
- Cash to start
- $30,000 + $9,000 = $39,000, on top of your emergency fund.
The full monthly cost
On top of the mortgage come property tax (paid to your city and county; often about 1% of the home's value a year), homeowners insurance, PMI, and upkeep. Renters call the landlord when the water heater breaks. Owners pay for it. A common guess is 1% of the home's value a year for repairs.
- Each month
- $1,662.44 mortgage + $275 property tax + $150 insurance + $135 PMI + $250 upkeep = $2,472.44.
- Upkeep
- $300,000 × 0.01 = $3,000 a year: $3,00012 = $250 a month.
The 28% rule
Lenders often use the 28% rule: your housing payment (mortgage, property tax, insurance and PMI) should be at most 28% of your monthly income before taxes. Upkeep isn't in it, so leave room for that too.
- Your limit
- $8,000 × 0.28 = $2,240.
- Housing payment
- $1,662.44 + $275 + $150 + $135 = $2,222.44. Just under, so you pass.
What you get back: equity
Here's the part your friend is right about. Equity is what your home is worth minus what you owe. It grows two ways: as principal pays down the loan, and if the home's value rises. When you sell, equity comes back to you, minus selling costs (often about 6% of the price, mostly agent fees).
- At the start
- $300,000 value − $270,000 owed = $30,000, your down payment.
- After year 1
- You've paid $3,163.89 of principal. If the home also rose 3%, it's worth $309,000: $309,000 − $266,836.11 = $42,163.89 of equity.
So, rent or buy?
Compare the money that's gone either way. Renting: the rent. Owning: interest, tax, insurance, PMI, upkeep, closing and selling costs, minus any rise in value. Buying has big costs at the start and end, so it usually wins only if you stay long enough. A common rule of thumb is about 5 years.
What you're looking at: the money you'd never get back, renting vs. owning the $300,000 house, for as many years as you choose. It assumes rent and home value both rise 3% a year, tax 1.1% and upkeep 1% of the value each year, insurance $150 and PMI $135 a month, $9,000 to close and 6% to sell. It leaves out what the $39,000 could have earned if you'd invested it, which would make buying win a bit later.
Two minutes. Just listen.
Tap any line to jump to it.
House hunt.
Eight moments from renting and buying. Each one gives you the facts. Do the math or make the call, then tap your answer. One try each.
What you're looking at: made-up home-buying situations. Each lists the facts, then asks one question.
The logic, step by step.
Four checks before you buy a home.
Step 1: Cash to start
- $300,000 house
- $30,000 + $9,000 = $39,000.
Step 2: The 28% check
- You
- $2,222.44 vs. $8,000 × 0.28 = $2,240. Pass, barely.
Step 3: The full monthly cost
- You
- $2,222.44 + $250 = $2,472.44, vs. $1,800 rent.
Step 4: How long will you stay?
- After 2 years
- Gone renting: about $43,848. Gone owning: about $62,822. Renting wins.
- After 10 years
- Gone renting: about $247,620. Gone owning: about $193,372. Owning wins.
Worked example: should you buy?
- Cash? You have $39,000 saved beyond your emergency fund. Pass.
- 28%? $2,222.44 is under $2,240. Pass, with almost no room to spare.
- Full cost. $2,472.44 a month, $672.44 more than rent.
- Staying? If your job might move you within 3 years, the closing and selling costs make renting cheaper.
- The call. Buy only if you plan to stay 5 years or more. Otherwise, keep renting and invest the $39,000.
The beaver builds to stay.
A beaver family spends weeks building a dam and a lodge of sticks and mud. It's a huge job, and the repairs never stop: every leak gets patched. But a good lodge can shelter the family for years, even generations.
What you're looking at: an illustration, not data. A beaver lodge in a pond, a dam behind it, and a beaver bringing another branch.
Why this sticks. Buying a home is like building a lodge: a big cost up front and repairs forever. It pays off when you stay for years. If you might move soon, rent, like the hermit crab in Lesson 7.1.
The page you'd copy down.
- Mortgage: home loan, often 30 years. $270,000 at 6.25% = $1,662.44 a month; $328,478.40 of interest over 30 years.
- Early payments are mostly interest: first payment $1,406.25 interest, $256.19 principal.
- Cash to start = down payment + closing costs (2% to 5%): $30,000 + $9,000 = $39,000.
- Under 20% down usually means PMI, which protects the lender.
- Full monthly cost = mortgage + property tax + homeowners insurance + PMI + upkeep (about 1% of value a year): $2,472.44.
- 28% rule: housing payment ≤ income × 0.28. $8,000 × 0.28 = $2,240.
- Equity = home value − what you owe. Grows from principal and rising value.
- Buying usually beats renting only if you stay about 5 years or more.
Fill in the blanks
Grab a friend or a study group.
Same street, two prices
Find a home for sale and a similar rental in the same area. Work out the full monthly cost of each. How far apart are they?
Debate it
One side argues "rent is throwing money away." The other argues "owning has hidden costs." Each side has to use real numbers from this lesson.
Ask an owner
Ask a homeowner you know: what surprise repair cost the most? How long have they lived there? Would they buy again?
Just you and your money.
These stay on this device. Nobody else sees them.
Exam-style questions.
Written the way a college exam would ask them. Each right answer on the first try is worth 10 xp.
On the job: you're a mortgage loan officer
Dana and Chris want to buy their first home. Here are their numbers:
- Together they earn $7,500 a month before taxes.
- They have $45,000 saved, beyond their emergency fund.
- House A: $350,000 with 5% down. Housing payment (mortgage, tax, insurance, PMI): $2,717.26 a month.
- House B: $280,000 with 10% down. Housing payment: $2,076.61 a month.
- Closing costs are about 3% of the price for either.
Your task: check each house with the 28% rule and the cash they need to start. Which one fits?
See a model answer
Their 28% limit: $7,500 × 0.28 = $2,100.
House A: cash to start $350,000 × 0.05 = $17,500 down + $350,000 × 0.03 = $10,500 closing = $28,000. They have it. But $2,717.26 is $617.26 over the $2,100 limit. It doesn't fit.
House B: cash to start $28,000 down + $8,400 closing = $36,400, under their $45,000. And $2,076.61 is under $2,100. It fits, with $8,600 left over to start a repair fund.
Advice: House B, if they plan to stay at least about 5 years. They should budget about 1% a year for upkeep: $280,000 × 0.01 = $2,800 a year.
Home, and what comes next.
What you're looking at: a map of where this lesson fits in the course. Read it left to right: the lessons it builds on, this lesson in the middle, and where to go next.
- Before · Unit 7Rent your first apartment
- Back · Unit 4Loans
- Back · Unit 4Your credit score
- You are hereRent or buy a home?
- Next open · Unit 5Why invest?