Key point
As of May 2026, the 30-year fixed mortgage rate is in the 6.5–7.5% range (Freddie Mac PMMS). At 7%, a $400,000 mortgage carries a monthly principal-and-interest payment of about $2,661. The same loan at 3% (2021) was $1,686 per month — a 58% increase in payment on identical loan principal. Rate changes dwarf the effect of small price moves.
Compare
| Cost Category | Renting | Owning |
|---|---|---|
| Monthly housing payment | Rent — fully deductible against housing budget | PITI: Principal + Interest + Property Tax + Insurance |
| Down payment / security deposit | 1–2 months rent (low opportunity cost) | Typically 20% of purchase price — that capital earns nothing in the house |
| Maintenance | Landlord's problem | Rule of thumb: 1–2% of home value per year ($6,000–$12,000 on a $600K home) |
| PMI (Private Mortgage Insurance) | N/A | Required if down payment < 20%; typically 0.5–1.5% of loan per year |
| Building equity | None | Early years: mostly interest; equity builds slowly on a standard amortization schedule |
| Flexibility | High — can move in 30–60 days | Low — selling typically costs 6–8% of price (agent commissions + closing costs) |
Key insight
Formula
Monthly Ownership Cost = PITI + Maintenance/12 + PMI + Opportunity Cost of Down Payment / 12
Key point
Amortization front-loads interest. On a 7% $500,000 mortgage, your first monthly payment of $3,327 includes $2,917 in interest and only $410 in principal. After five years of on-time payments, you have paid $199,620 — but your balance is only down by about $28,000. The rest went to interest. This is why the early years of homeownership build equity so slowly — and why selling before year five or six rarely recovers transaction costs.
Note
PMI (Private Mortgage Insurance) protects the lender, not you, if you default. It typically costs 0.5–1.5% of the loan amount per year. On a $450,000 loan that is $2,250–$6,750 per year, or $188–$563 per month — a significant addition to your payment. PMI is typically removed once your equity reaches 20% of the original purchase price (Homeowners Protection Act of 1998). FHA loans have a different structure: mortgage insurance premium (MIP) often lasts the life of the loan regardless of equity.
Key point
Adjustable-rate mortgages (ARMs) offer a lower initial fixed rate (commonly 5/1, 7/1, or 10/1 — meaning 5, 7, or 10 fixed years before annual adjustments). A 5/1 ARM at 5.75% versus a 30-year fixed at 7.0% saves about $350/month on a $500,000 loan. The risk: if rates remain elevated when the ARM resets, your payment can jump significantly. ARMs make sense when you have high confidence you will sell or refinance before the fixed period expires.
Note
At closing, a lender will offer to sell you discount points — also called a rate buydown. The deal: pay an extra fee upfront, and the lender lowers your interest rate. The standard pricing is roughly 1 point = 1% of the loan amount, paid upfront, to drop the rate by about 0.25%. Whether it's worth it comes down to one calculation: how long until the upfront cost pays for itself?
The break-even formula:
Break-even (years) = Upfront point cost ÷ Annual payment savings
Worked example. You're borrowing $400,000. You pay 1 point = 1% × $400,000 = $4,000 upfront to cut the rate from 7.00% to 6.75% (a 0.25% reduction). On a 30-year loan, that quarter-point lowers your monthly payment by roughly $66, or about $792 per year. Break-even = $4,000 ÷ $792 ≈ 5.0 years.
How to read it: if you'll keep the loan (stay in the house AND not refinance) for LONGER than ~5 years, buying the point saves you money — every year past break-even is pure savings. If you expect to sell or refinance SOONER than 5 years, skip the points and keep your $4,000. Notice this is the same hold-time logic as the rent-vs-buy break-even earlier in the module: points only pay off if you stay put long enough. A shorter hold favors keeping cash; a long hold favors buying down the rate.
Compare
| Question | Rent | Buy |
|---|---|---|
| Likely time in the home? | Under 5–6 years | Over 6 years (transaction costs require a long hold to break even) |
| Is your job / city stable? | Uncertain | High confidence for 5+ years |
| Monthly rent vs. 5% rule? | Below the 5% threshold | Rent exceeds 5% rule of home you want |
| Down payment available? | No (or better deployed elsewhere) | Yes, plus reserves for closing costs and repairs |
Key point
Transaction costs matter more than most buyers realize. Buyer's closing costs run 2–5% of purchase price; seller's costs run 6–8% (real estate commissions + transfer taxes + title + attorney). On a $500,000 home, roundtrip transaction costs can approach $40,000–$65,000. To break even, the home must appreciate enough to cover those costs — which takes longer at higher mortgage rates because less capital is available to compound in other assets.
Try it
Check-in
Sit with the ideas.
You are comparing two options: (A) buy a $480,000 home with 20% down at 7.0% for 30 years, or (B) rent a comparable unit for $2,200/month and invest the $96,000 down payment at a 7% annual return. You plan to stay 4 years. Ignoring appreciation, which is likely the stronger financial outcome?