The 5% Rule for Renting vs Buying, Rebuilt for 7.4% Mortgage Rates
The 5% rule is a quick test: if a comparable home rents for less than 5% of its price per year, renting costs less than owning's unrecoverable costs. At today's 7.40% mortgage rate, the same components add up to about 6.14% of the price, so the break-even rent on a $420,000 home is about $2,148 a month, not $1,750. Below: how the rule works, a calculator, and where it stops being reliable.
Updated October 17, 2026. Mortgage rate: Freddie Mac PMMS, week of October 15, 2026. Full-model figures: our rent vs buy calculator at its national defaults.
What the 5% rule says
The rule comes from Ben Felix, a portfolio manager at PWL Capital in Canada, who laid it out in a video titled "Renting vs. Buying a Home: The 5% Rule". His starting point is that comparing rent with a mortgage payment is the wrong test. Part of a mortgage payment is principal, which you keep as home equity, and the payment leaves out several costs owners pay on top of it. The fair comparison is between the money each side spends and never gets back.
For a renter, that is the rent. For an owner, Felix groups the unrecoverable costs into three parts, each a share of the home's value per year:
- Property tax, about 1%. Paid every year for as long as you own the home.
- Maintenance, about 1%. Repairs, replacements and upkeep. Some years cost little, some cost a roof.
- Cost of capital, about 3%. Interest on the mortgage, plus the return the down payment would have earned in a diversified portfolio, net of what the home itself is expected to gain in value.
Add them up to 5%, multiply by the price and divide by 12, and you have the monthly rent at which renting and owning cost about the same each year. For a $420,000 home, $420,000 × 5% = $21,000 a year, or $1,750 a month. If a comparable home rents for less, renting is the cheaper option by this measure; if it rents for more, owning is.
The rule at today's 7.4% mortgage rate
The rule's 3% cost of capital was set when mortgages were far cheaper: Freddie Mac's 30-year average reached a record low of 2.65% in January 2021. Today's rate is 7.40% (Freddie Mac PMMS, week of October 15, 2026). Here is the same rule rebuilt from the inputs our calculator uses for a typical U.S. purchase, with insurance added as its own line:
| Component (% of the home's value a year) | Classic rule | Today's inputs | Where the figure comes from |
|---|---|---|---|
| Property tax | 1% | 0.9% | U.S. median real estate taxes ÷ median home value, Census ACS 2024 (0.89%) |
| Maintenance | 1% | 1% | Planning rule of thumb; Angi's 2025 survey implies about 0.8% including emergencies |
| Homeowners insurance | Not a separate line | 0.42% | $1,750 a year ÷ $420,000; NAIC average HO-3 premium $1,737 (2023 data) |
| Interest on the loan | Part of the 3% | 5.92% | 80% of the price borrowed × 7.40% |
| Return given up on the down payment | Part of the 3% | 1.40% | 20% of the price × 7% expected return |
| Expected price growth | Netted out of the 3% | −3.5% | Our long-run assumption, below the 30-year FHFA and Case-Shiller averages |
| Cost of capital, net | 3% | 3.82% | Interest + return given up − price growth |
| Total | 5% | 6.14% | |
| Break-even rent on a $420,000 home | $1,750/mo | $2,148/mo | Price × total ÷ 12 |
The biggest change is the interest. At 7.40%, interest on a loan of 80% of the price costs 5.92% of the home's value in the first year, more than the whole 3% the classic rule allows for capital. Against that, the model expects the home to gain 3.5% a year, which cancels part of it. The net cost of capital comes to 3.82%, and the total to 6.14%: a break-even rent of $2,148 a month on a $420,000 home, $398 more than the classic rule's $1,750.
Our full rent vs buy model, which adds buying and selling costs, the mortgage interest deduction, rent increases and the loan paydown, puts the break-even rent for the same home at $2,280 for a 7-year stay. So at today's rates the classic rule understates the rent at which buying pays off by about $530 a month, and the rebuilt rule lands within $132 of the full model.
Try it: the 5% rule calculator
Enter a price, the rent on a comparable home and your own rates. The calculator shows three monthly rents for the same home: the classic rule, the rule rebuilt from your inputs, and the break-even rent from our full model at the same inputs and the stay length you choose.
Your numbers
Same size and area as the home you'd buy.
Freddie Mac average: 7.40%, week of October 15, 2026.
The rule ignores how long you stay; the full model doesn't.
Break-even rent for this home
Your rent of $2,250 is $102 above the rule's break-even rent. By the rule's measure, owning this home costs less a year than renting it.
In the full model, a rent of $2,250 is $30 below the break-even rent, so renting comes out ahead over 7 years.
The rule and the full model differ by $132 a month. The rule leaves out buying and selling costs, PMI, the tax deduction, rent increases and loan paydown; the full model includes them.
How the rule with your inputs adds up (% of the home's value a year)
| Property tax | 0.90% |
|---|---|
| Maintenance | 1.00% |
| Insurance | 0.42% |
| Interest on the loan (loan share × rate) | 5.92% |
| Return given up on the down payment | 1.40% |
| Expected price growth | −3.50% |
| Cost of capital (net) | 3.82% |
| Total unrecoverable cost | 6.14% |
Estimates for comparison, not financial advice. Defaults are our national figures: a $420,000 home, $2,250 rent, 20% down, today's average rate.
How the mortgage rate moves the break-even rent
Because interest is the largest unrecoverable cost, the mortgage rate moves the rule more than any other input. Same $420,000 home, 20% down, everything else at our national defaults:
| Mortgage rate | Cost of capital, net | Rule total | Rule's break-even rent | Full model, 7-year stay |
|---|---|---|---|---|
| 3.00% | 0.30% | 2.62% | $916 | $1,450 |
| 5.40% | 2.22% | 4.54% | $1,588 | $1,890 |
| 6.40% | 3.02% | 5.34% | $1,868 | $2,080 |
| 7.40% (today) | 3.82% | 6.14% | $2,148 | $2,280 |
| 8.40% | 4.62% | 6.94% | $2,428 | $2,470 |
Two patterns stand out. Near today's rate, the rebuilt rule and the full model agree within about $212 a month, so the rule is a fair first screen. At a 3% rate, the rule's cost of capital nearly disappears (0.30%) because expected price growth offsets most of the interest, and its break-even rent ($916) falls $534 below the full model's. The difference is buying and selling costs, which the rule leaves out and which matter most when the yearly costs are small.
Where the 5% rule breaks
Short stays: buying and selling costs
Buying costs (3% of the price in our defaults) and selling costs (6%, mostly agent commissions) are paid once, so the shorter the stay, the more they cost per year. The rule has no line for them. In the full model, the break-even rent for the same $420,000 home at 7.40% depends heavily on how long you stay:
| Stay | Full-model break-even rent | vs the rule's $2,148 |
|---|---|---|
| 2 years | $3,410 | +$1,262 |
| 3 years | $2,880 | +$732 |
| 5 years | $2,450 | +$302 |
| 7 years | $2,280 | +$132 |
| 10 years | $2,150 | +$2 |
| 15 years | $2,070 | −$78 |
For a stay of a few years the rule makes buying look much better than it is. Past about 10 years the two converge, and for long stays the full model's break-even rent drops slightly below the rule's. Our guide on how long you need to stay covers the break-even year in detail.
Price growth is an assumption, not a fact
The rule subtracts expected price growth from the cost of owning, so the result is only as good as that guess. National prices have been roughly flat lately: the Realtor.com median list price was −1.4% year over year in September 2026 (FRED, MEDLISPRIUS). Here is the rule at different growth rates:
| Price growth a year | Rule total | Rule's break-even rent | Full model, 7-year stay |
|---|---|---|---|
| 0% | 9.64% | $3,373 | $3,160 |
| 2% | 7.64% | $2,673 | $2,680 |
| 3.5% (our default) | 6.14% | $2,148 | $2,280 |
| 5% | 4.64% | $1,623 | $1,840 |
With no price growth, the unrecoverable cost of owning this home is 9.64% of its value a year. That is the number to keep in mind if you are not counting on appreciation.
Taxes and rent increases
- The tax deduction. Mortgage interest and property tax are deductible only if you itemize (IRS Publication 936). In our model, a single filer earning $100,000 saves about $3,489 in federal tax in the first year on this home. The rule ignores it.
- Rent goes up; a fixed-rate payment doesn't. The rule compares this year's rent with this year's owning costs. Over a long stay, rising rent favors the owner, one reason the full model's break-even rent falls below the rule's for stays of 15 years.
How to use the rule
- Find the rent on a home like the one you'd buy: same size, same neighborhood, similar condition. Single-family rents usually run higher than apartment rents.
- Multiply the price by the rule's percentage and divide by 12. At today's rates, use your own components (about 6.14% at our national defaults) rather than a flat 5%, or use the calculator above.
- Compare. A rent well below the result means renting costs less than owning's unrecoverable costs; a rent well above means owning costs less.
- If it's close, or you might move within about 10 years, run the full rent vs buy calculator: it adds buying and selling costs and gives you a break-even year.
To see how the comparison looks where you live, our 2026 rent vs buy report compares every state and the largest metro areas with local prices, rents and taxes. And if you are deciding whether to buy now or hold off for lower rates, see should you buy now or wait.
Sources
- Ben Felix (PWL Capital), YouTube, Renting vs. Buying a Home: The 5% Rule (video; link checked October 17, 2026)
- Freddie Mac, Primary Mortgage Market Survey (week of October 15, 2026)
- U.S. Census Bureau, American Community Survey 2024, table B25103 (median real estate taxes) (2025)
- NAIC, Dwelling Fire, Homeowners Owner-Occupied and Homeowners Tenant and Condominium/Cooperative Unit Owner's Insurance Report: Data for 2023 (2026)
- IRS, Publication 936, Home Mortgage Interest Deduction (current edition)
- Realtor.com via FRED, Median Listing Price in the United States (MEDLISPRIUS) (September 2026)
Frequently Asked Questions
By Barron Hansen, Founder · Last reviewed
Rent vs buy by state
State-level context for the markets most relevant to this guide.