If you’re on the fence between renting and buying, the 5-Year Rule can simplify the decision.
It’s a proven benchmark showing when homeownership typically starts paying off versus renting — factoring in appreciation, rent inflation, and transaction costs.
Below, we’ll break down how the 5-year rule works, explore real-life case studies, and show how to calculate your personal break-even point using the Rent vs Buy Calculator
1. The Logic Behind the 5-Year Rule
Buying a home comes with big upfront costs — down payment, closing fees, and property taxes — while renting often looks cheaper in the first few years.
But over time, ownership wins because:
Your mortgage payment stays fixed, while rent usually rises
You build equity and benefit from home appreciation
The value of owning compounds as your balance shrinks
In most U.S. markets, the crossover point — when buying becomes cheaper — happens around year 5.
2. Key Inputs That Control Your Break-Even Time
| Factor | Effect on Break-Even |
|---|---|
| Mortgage Rate | Higher rates delay break-even |
| Home Appreciation | Faster growth accelerates break-even |
| Rent Inflation | Higher rent growth accelerates break-even |
| Selling Costs | Push break-even later (typically by 1–2 years) |
| Down Payment | Larger down payments shorten break-even slightly |
3. Example Scenario: The Classic 5-Year Crossover
Assumptions:
Home price: $400,000
Down payment: 10%
Mortgage rate: 6.5%
Rent: $2,500/month, rising 3% annually
Home appreciation: 3% per year
Selling costs: 6%
| Year | Renting (Total Paid) | Owning (Net Cost)* | Winner |
|---|---|---|---|
| 1 | $30,000 | $43,000 | Rent |
| 3 | $95,000 | $102,000 | Rent |
| 5 | $164,000 | $159,000 | Buy ✅ |
| 7 | $243,000 | $222,000 | Buy |
| 10 | $350,000 | $293,000 | Buy |
*Net cost = mortgage + taxes + insurance – equity + appreciation
At the 5-year mark, buying edges out renting — and the gap widens over time.
4. Sensitivity Table: How Your Market Shifts the Rule
| Mortgage Rate | Appreciation | Rent Inflation | Break-Even Year |
|---|---|---|---|
| 6.5% | 3% | 3% | 5 |
| 7.0% | 2% | 3% | 6–7 |
| 5.5% | 4% | 4% | 3–4 |
| 6.0% | 2% | 1% | 7–8 |
| 6.5% | 3% | 5% | 4 |
Takeaway:
In fast-appreciating or high-rent markets, break-even comes sooner (3–4 years).
In slower or high-rate environments, expect 6–8 years before ownership pulls ahead.
You can replicate this sensitivity test using the Mortgage Calculator and Mortgage Rate Calculator to model rate changes.
5. Selling Early: Why Timing Matters
Even if your home appreciates, selling too soon can erase your gains due to 5–8% transaction costs.
| Sale Year | Appreciation | Selling Costs | Net Position |
|---|---|---|---|
| 2 | +4% | –6% | –2% |
| 4 | +8% | –6% | +2% |
| 6 | +12% | –6% | +6% ✅ |
Buying makes sense only if you can stay long enough to recoup these costs through appreciation and equity buildup.
6. The Power of Fixed Payments vs Rising Rent
Over time, your mortgage payment stays level while rent typically increases 3–5% per year.
| Year | Monthly Rent | Monthly Mortgage (Fixed) |
|---|---|---|
| 1 | $2,500 | $2,528 |
| 5 | $2,814 | $2,528 |
| 10 | $3,242 | $2,528 |
7. The 5-Year Rule Is About Break-Even, Not Emotion
The goal isn’t just “buy as soon as possible” — it’s about reaching break-even at a point that fits your lifestyle.
Buying wins when:
You’ll stay 5+ years
You can comfortably handle ownership costs
You expect moderate appreciation and rising rent
Renting still makes sense if:
You’ll move soon
You value liquidity and flexibility
Market conditions are uncertain
8. Case Study: High-Rate Market, Fast Rent Growth
Scenario:
Home price: $500,000
Rate: 7.0%
Rent: $2,800/month → +5%/yr
Appreciation: 3%
Horizon: 8 years
Result:
Break-even ≈ Year 6
By year 8, buying wins by $42,000 — even with a high rate — because rent inflation compounds faster than mortgage costs.
9. How to Find Your 5-Year Point
Use the Rent vs Buy Calculator:
Enter your rent, home price, and mortgage rate.
Add your assumptions for rent inflation, appreciation, and holding period.
Run multiple horizons (3–10 years).
Note where total buying cost falls below total renting cost — that’s your break-even year.
🧮 For even more precision, plug in your actual interest rate using the Mortgage Rate Calculator
10. Key Takeaways
The 5-Year Rule is an average — your real break-even may fall anywhere from 3–7 years.
Appreciation, rent inflation, and rate changes are the biggest drivers.
Selling too early eliminates your advantage.
Use calculators to personalize your break-even, not guess.
FAQ
Why is 5 years the rule of thumb for buying vs renting?
Because it typically takes 5 years for appreciation and equity to offset transaction and interest costs.Can buying pay off sooner?
Yes — in fast-growing markets or with high rent inflation, buying can break even in 3–4 years.What if I plan to move in 2–3 years?
Renting usually wins short-term since selling costs outweigh equity gains.Does the mortgage rate really change my break-even point?
Absolutely — each 1% change in rate can shift your break-even by 1–2 years.