Upfront costs of buying
- Down payment: Usually 3–20% of the price. Under 20% on a conventional loan means PMI, and a larger down payment lowers your monthly cost.
- Closing costs: Lender fees, appraisal and inspection, title insurance, recording fees, prepaid interest and initial escrow deposits. Often around 2–5% of the loan amount, varying widely by area.
- Agent commissions: Traditionally paid by the seller, but since the National Association of Realtors settlement took effect in August 2024, buyers must sign a written agreement with their own agent, including the agent’s pay, before touring homes. Commissions are not set by law and are negotiable.
- Moving and setup: Budget separately for furniture, repairs and utility deposits.
Ongoing costs of owning
- Property tax: Assessed every year by local governments such as counties and cities. Effective rates range from around 0.3% to more than 2% of value, depending on where you live.
- Homeowners insurance: Effectively required if you have a mortgage. Flood and earthquake coverage are separate policies, and premiums have climbed sharply in disaster-prone states such as Florida and California.
- HOA dues: Fees for condos, townhouses and planned communities, from tens to hundreds of dollars a month. Major repairs can bring special assessments.
- Maintenance and repairs: Roofs, HVAC systems, appliances and more. A common rule of thumb is to budget 1–2% of the home’s value per year.
- Costs of selling: Agent commissions and transfer costs typically take several percent of the sale price. If you owned and lived in the home as your main residence for at least two of the last five years, up to $250,000 of gain ($500,000 for married couples filing jointly) is tax-free.
Example: a $400,000 home vs. $2,200 a month in rent
Every number below is an assumption for illustration: a $400,000 home, 20% down, $12,000 in closing costs, a 30-year fixed rate of 6.5%, property tax of 1.1% a year, $1,800 a year for homeowners insurance, maintenance of 1% a year, $2,200 a month to rent a comparable home, and a hypothetical 4% annual return on cash not tied up in the house. Real rates, taxes and prices vary by place and time.
In this example, buying costs about $660 more per month in the first year. What closes the gap over time is appreciation, the growing share of each payment that goes to principal, and a fixed principal-and-interest payment while rent can rise every year. That is why buying tends to look better the longer you stay, and why it often comes out behind if you expect to move within a few years, once buying and selling costs are counted.
| Item (example) | Buy | Rent |
|---|---|---|
| Cash needed upfront | $92,000 ($80,000 down + $12,000 closing) | $4,400 (first month + one-month deposit) |
| Mortgage P&I / rent | $2,023 | $2,200 |
| Property tax (monthly) | $367 | None (built into rent) |
| Homeowners / renters insurance (monthly) | $150 | $20 |
| Maintenance (monthly) | $333 | None |
| Total monthly cash outlay | $2,873 | $2,220 |
| Principal paid in year one (stays as equity) | About $298 a month | None |
| Opportunity cost of upfront cash (4% assumed) | About $307 a month | None |
| Effective monthly cost (outlay − principal + opportunity cost) | About $2,882 | About $2,220 |
Example data. Price changes, the mortgage interest deduction and selling costs are not included. If the home appreciated 3% a year, that would add about $12,000 ($1,000 a month) of value in year one, but prices can also fall.
Price-to-rent ratio and opportunity cost
This rough gauge compares the purchase price of a home with a year’s rent for a similar one. A common rule of thumb says a ratio of 15 or below tilts toward buying, 21 or above toward renting, and the range in between is a toss-up. Interest rates, property taxes and insurance can move those cutoffs a lot, so it is more accurate to run the line-by-line numbers above as well.
Opportunity cost is what your down payment and closing costs might have earned if they were not tied up in the house. The result swings widely depending on the return you assume, and that return is not guaranteed. On the other side, owning brings forced savings through principal payments and housing stability, which are not purely financial.
Price-to-rent ratio = home price ÷ (monthly rent × 12) Example: 400,000 ÷ (2,200 × 12) ≈ 15.2
Renting basics
- Lease: Usually a 12-month term that you renew or that converts to month-to-month. Breaking a lease early can mean a fee or owing rent until the unit is re-rented, so read the early termination clause.
- Screening: Landlords check credit, income (often about three times the monthly rent; in New York City, the custom is annual income of 40 times the monthly rent) and references from past landlords. Newcomers without US credit history may be asked for a guarantor or a guarantor company.
- Security deposit: Many states cap deposits. New York limits them to one month’s rent; California has generally capped them at one month since July 2024 (two months for small individual landlords); some states, such as Texas, set no cap. State law also sets return deadlines (21 days in California, 14 in New York) and itemized deduction rules.
- Renters insurance: The landlord’s policy covers only the building, so renters insurance protects your belongings and covers your liability. Many leases require it.
- Broker fees: In New York City, the FARE Act (effective June 11, 2025) bars charging tenants the fee of a broker hired by the landlord. If you hire your own broker, you pay that broker. Practices vary elsewhere.
Tenant protections
The federal Fair Housing Act prohibits refusing to rent, or setting different terms, because of race, color, national origin, religion, sex, disability or familial status (having children), and you can file a complaint with HUD. Most states recognize an implied warranty of habitability, which requires landlords to keep the home livable, with heat, water and basic safety.
A landlord cannot remove you by changing the locks or putting your belongings out without going to court; an eviction requires a court judgment. Notice periods and procedures vary by state.
Rent increase limits also differ by state and city. California caps increases on many multifamily buildings more than 15 years old at 5% plus inflation (10% at most), and Oregon at 7% plus inflation (10% at most). Rent-stabilized apartments in New York City can go up only by the percentages set by the Rent Guidelines Board. Many states have no cap, so rent is reset to the market at renewal.
FAQ
How much of my income should go to rent?
HUD considers households that spend more than 30% of income on housing to be cost-burdened. Many landlords require income of about three times the monthly rent.
Does paying rent on time build credit?
Not by default, but in some cases your landlord or a rent-reporting service can report payments to the credit bureaus. Unpaid rent that goes to collections, on the other hand, can hurt your score.
What if my landlord keeps my deposit?
If the landlord does not return it with an itemized statement within the state deadline, you can file in small claims court, and some states award a multiple of the deposit as damages. Photos at move-in and move-out help avoid disputes.