08 · Topic
A house is a borrowed-money bet you also get to live in.
Key numbers
Borrowed money cuts both ways
Put $80,000 down on a $400,000 house and you control a $400,000 asset with $80,000 of your own money. The bank funds the other $320,000. If the house gains 5% in a year, it is worth $420,000, and your $80,000 of equity just became $100,000. A 5% move in the house became a 25% move in your money.
The same math runs in reverse. A 5% drop takes the house to $380,000 and your equity to $60,000, a 25% loss. Add the fact that you owe the bank the full $320,000 no matter what the house is worth, and you can see why a small price drop can leave someone underwater, owing more than the house will sell for.
This is the part most first-time buyers miss. A house is not a savings account with a yard. It is a borrowed bet on one asset, in one zip code, that you happen to sleep in.
The real monthly cost is PITI plus upkeep
People quote the mortgage payment and call it the cost of the house. The real cost has five parts, and the industry packs the first four into one word: PITI.
- Principal: the slice that pays down what you borrowed.
- Interest: the rent you pay the bank for the loan.
- Taxes: property taxes, often 1 to 2% of the home value a year.
- Insurance: homeowners insurance, and PMI if you put under 20% down.
Then add the part PITI leaves out: maintenance, about 1% of the home value a year. On a $400,000 house that is $4,000 a year, or about $333 a month, for the roof, the water heater, the HVAC, and the thousand small things that break. So a $2,000 mortgage payment is really closer to $2,700 all in.
| Cost line | Monthly |
|---|---|
| Principal & interest | $2,000 |
| Property taxes | $420 |
| Homeowners insurance | $120 |
| Maintenance (~1%/yr) | $160 |
| True monthly cost | $2,700 |
When you compare a house to a rent number, compare $2,700, not $2,000. Rent already bakes in taxes, insurance, and the landlord's repair bill.
Amortization is front-loaded, so equity builds slowly
Every fixed-rate mortgage uses the same payment every month, but the split between interest and principal shifts over time. Early on, almost all of the payment is interest, because interest is charged on the full balance you still owe. As the balance falls, more of each payment goes to principal.
Take a $320,000 loan at the current 30-year fixed rate of about 6.5% as of June 2026. The monthly principal and interest is roughly $2,023. Here is where the first year's payments actually go.
| Year of loan | Goes to interest | Goes to principal |
|---|---|---|
| Year 1 | ~$20,600 | ~$3,700 |
| Year 10 | ~$18,200 | ~$6,100 |
| Year 20 | ~$11,600 | ~$12,700 |
| Year 30 | ~$800 | ~$23,500 |
In year one you pay about $24,300 and only $3,700 of it lands in your own equity. The rest is interest, gone to the bank. This is why the idea that you are "building equity instead of paying rent" is half true at best in the early years. Most of your payment really is rent, just paid to a lender.
The 28/36 rule
Keep your full housing payment under 28% of gross monthly income, and keep all debt payments combined under 36%. On a $90,000 salary, that is about $2,100 for housing and $2,700 for total debt. Borrowing up to the lender's limit is how people end up house-poor, with a nice kitchen and no savings.
Down payment, PMI, and the 20% line
You can buy a house with 3 to 5% down on many loan types. The catch is that anything under 20% down triggers private mortgage insurance, which protects the lender if you default and does nothing for you. PMI commonly runs 0.5 to 1.5% of the loan a year, so on a $320,000 loan that is $1,600 to $4,800 a year, or $130 to $400 a month of pure cost.
PMI is not forever. On most loans it drops off once you reach 20% equity, either by paying down the balance or by the home appreciating. Putting 20% down from the start skips it entirely and shrinks the loan, which is why the 20% mark matters even though smaller down payments are allowed.
Closing costs and why short stays favor renting
Buying and selling a house is expensive in ways that never show up on the listing. You pay 2 to 5% in closing costs to buy: loan origination, appraisal, title insurance, and taxes. Then you pay about 6% to sell, mostly the real estate commissions split between the two agents.
On a $400,000 house, that is roughly $8,000 to $20,000 going in and around $24,000 coming out. Call it $32,000 to $44,000 in round-trip friction. Your house has to appreciate enough to cover all of that before you have made a single dollar.
That friction is why a short stay favors renting. If you sell after two years, the transaction costs almost always swamp any price gain, and you walk away with less than a renter who invested the difference. If you run the numbers in the rent vs buy calculator, you will see the buy line start deep in the red and slowly climb out.
The breakeven, and what rent vs buy really compares
Add up the transaction costs and the answer to "should I buy?" usually comes down to one question: how long will you stay? The breakeven is typically 5 or more years, the point where home appreciation and the equity you have built finally outrun the cost of buying and selling.
The trap is comparing a mortgage payment to a rent payment. That is the wrong comparison. Rent vs buy is a net-worth comparison over time. The honest version asks: after X years, which path leaves me with more money, owning the house and selling it, or renting and investing every dollar I would have spent on the down payment, the closing costs, and the gap between rent and the true cost to own?
| Years in the home | Who is ahead |
|---|---|
| 2 years | Renting, by a wide margin |
| 5 years | Roughly a tie |
| 10 years | Buying, usually |
| 30 years | Buying, with the loan paid off |
None of this means owning is a mistake. A paid-off house in retirement is one of the most reliable ways to cut your living costs to almost nothing. It means owning is a long bet, and the math only works if you plan to stay.
Price is what you pay. Value is what you get.Warren Buffett
Common mistakes
- 01Comparing the mortgage payment to rent and stopping there. A $2,000 mortgage payment is closer to $2,700 once you add property taxes, insurance, and about 1% of the home value a year in maintenance. Rent already includes all of that.
- 02Buying with under 20% down and ignoring PMI. Private mortgage insurance can add $100 to $300 a month on a typical loan, buys you nothing, and sticks around until you reach 20% equity.
- 03Forgetting transaction costs. You pay 2 to 5% to buy and about 6% to sell. On a $400,000 house that is $8,000 to $20,000 going in and around $24,000 coming out, money you never get back.
- 04Buying when you might move in 3 years. Below the 5-year breakeven, the transaction costs alone usually wipe out any gain, so renting leaves you with more money.
- 05Stretching past the 28/36 rule. When the housing payment runs past 28% of gross income, one job change or one $6,000 roof bill turns the house from an asset into a trap.
FAQ
Is buying always better than renting?+
No. Buying wins only if you stay long enough to outrun the cost of buying and selling, which usually means 5 or more years. Below that, the 2 to 5% you pay to buy and the 6% you pay to sell tend to erase any gain, and renting leaves you with more money.
How much do I actually need for a down payment?+
You can buy with as little as 3 to 5% down on many loans, but anything under 20% triggers private mortgage insurance, which adds $100 to $300 a month and buys you nothing. Putting down 20% removes PMI and shrinks the loan.
What does the 28/36 rule mean?+
Keep your total housing payment under 28% of gross monthly income, and keep all your debt payments combined, housing plus car plus student loans plus cards, under 36%. Lenders use a version of this to size your loan, and it is a sane ceiling for you too.
Why is a $2,000 payment really $2,700?+
The mortgage payment covers principal and interest. The full cost adds property taxes, homeowners insurance, and about 1% of the home value a year in upkeep. Those extras commonly run 30 to 40% on top of the base payment.
Further reading
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- Home Buying Kit For Dummies
by Eric Tyson & Ray Brown
The clearest start-to-finish walkthrough of a purchase: mortgages, inspections, closing, and the costs nobody warns you about. Skip the listicles and read this first.
- The Book on Rental Property Investing
by Brandon Turner
If the house is also meant to make money, this covers how to underwrite a rental so the math works before you sign, not after.
- The Millionaire Real Estate Investor
by Gary Keller
A framework for treating property as a long-hold asset class. Useful even if you only ever buy one home, because it teaches you to price the hold cost honestly.