A rent-vs-buy calculator tells you "buying breaks even at year 7." That single number hides every uncertainty in the model: home appreciation, stock returns, rent growth, what happens to interest rates, whether you actually stay 7 years. The break-even is not a fact — it's the median of a distribution that includes paths where buying wins in year 3 and paths where it never wins at all. Treating the median as the answer is the most common financial mistake in the buy-vs-rent debate. This guide walks why deterministic calculators mislead, why Monte Carlo is the right shape, and the US-specific tax structure (SALT cap, capital-gains exclusion, mortgage interest deduction) that flips the math for high earners in high-tax states.
The Mortgage Formula Is a Point Estimate
The standard monthly payment formula:
M = P × [r(1+r)^n] / [(1+r)^n - 1]
where P is principal, r is monthly interest rate, n is number of payments. For a $500K loan at 7% over 30 years: M ≈ $3,327. This is exact — the bank uses this formula to compute your bill. It's also where most calculators stop.
But your real question isn't "what's the payment?" — your bank already told you. Your real question is whether the total cost of owning, over your actual holding period, beats the total cost of renting (which is rent + the foregone returns of investing your down payment somewhere else). And that comparison depends on:
- How fast does the home appreciate? (Average ~3.5%/yr nominal, std dev ~5% — wide variance.)
- How fast do stocks return? (S&P 500 long-run real return ~7%/yr, but the path matters because it determines your renter-portfolio's value at exit.)
- How fast does rent grow? (Highly local; can range from -1% to +12% per year depending on city and year.)
- What's your marginal tax rate at sale? (For capital gains exclusion calculations.)
Every one of these has a distribution. The mortgage formula gives you a number; the distributions give you a range.
What Monte Carlo Does Differently
Monte Carlo simulation runs the comparison thousands of times, each time sampling a different path for the random variables. The Rent vs Buy Calculator runs 5,000 paths. For each path:
- Pick a sample appreciation rate (year by year, with correlation across years)
- Pick a sample stock return path
- Pick a sample rent growth path
- Compute the year-by-year ownership cost (mortgage + taxes + maintenance + insurance + HOA)
- Compute the year-by-year renter portfolio value (down payment + closing costs + monthly savings, all invested)
- At each year, compute what happens if you sell now: home sale - mortgage payoff - selling costs - capital gains tax (after exclusion) vs renter portfolio value - capital gains tax on the portfolio
- Record which one wins, by how much
After 5,000 paths you get a distribution: the percentage of paths where buying wins at year 5, year 7, year 10; the dollar gap at the median; the gap at the 10th and 90th percentiles. The output is "buying wins in 73% of paths by year 10, with a median advantage of $42K and an 80% confidence interval of -$50K to +$180K." That's actionable. "Breaks even at year 7" is not.
The SALT Cap Changed the Math for Some States
Before 2018, you could deduct unlimited state and local taxes (SALT) from federal income tax. The 2017 Tax Cuts and Jobs Act capped this at $10,000 (combined state income tax + property tax). For high-tax states this is a major drag on buying.
Example: California homeowner, $200K household income, $4,000/month mortgage on a $700K home.
- Property tax: ~$8,000/yr (CA ~1.1% effective)
- State income tax: ~$15,000/yr
- Total SALT before cap: $23,000
- Deductible under the cap: $10,000
- Lost deduction: $13,000/yr
- At a 35% marginal federal rate, that's $4,550/yr in extra federal tax
Pre-2018, the same homeowner deducted the full $23,000 — worth ~$8,050/yr at 35%. The cap costs them $3,500/yr in after-tax cash flow, every year.
States this hits hardest (high property tax + high income tax): CA, NY, NJ, CT, MA, IL. States it doesn't hit much: TX, FL, TN, NH (no state income tax) — homeowners there usually still benefit from full property-tax deduction up to the cap.
The Capital Gains Exclusion Saves Most Owners From Tax at Sale
Section 121 of the IRS code excludes:
- $250,000 of capital gains for a single filer
- $500,000 for a married couple filing jointly
Requirements: the home was your primary residence for at least 2 of the last 5 years, and you haven't used the exclusion in the prior 2 years.
For most 5–15 year holds in most markets, this eliminates capital gains tax on sale entirely. A couple buys at $700K, sells at $1.1M after 10 years — gain is $400K, fully excluded. No federal tax. (State varies; CA doesn't have a separate exclusion but most states piggyback the federal calculation.)
The exception is the long-hold, hot-market case: a couple buys at $500K in 2010, sells at $1.5M in 2026 — gain is $1M, exclusion covers $500K, remaining $500K is taxed at long-term capital gains rates (15% or 20% federal + state). For most buyers in most markets, this isn't where you'll be.
The renter side does not get this. Investment portfolio gains are taxed at long-term capital gains rates with no exclusion. This is a real and often-ignored advantage for the buyer side.
Mortgage Interest Deduction Helps Less Than You Think
The standard deduction for 2026:
- Single: $15,700
- Married filing jointly: $31,500
You can deduct mortgage interest only if you itemize, and you only itemize if your itemized deductions exceed the standard deduction. For a moderate-earner couple:
- Mortgage interest year 1 on a $500K loan at 7%: ~$34,800
- SALT (capped): $10,000
- Charitable + other: $3,000
- Total itemized: $47,800
Versus the $31,500 standard deduction, they're $16,300 ahead by itemizing. At 22% marginal rate, the incremental tax benefit of itemizing is $16,300 × 22% = $3,586/yr. Not $34,800 × 22% = $7,656/yr, which is what calculators that ignore the standard deduction will tell you.
Year 15 of the same loan: interest is down to ~$18,000, total itemized to ~$31,000 — below the standard deduction. The mortgage interest deduction now contributes zero to tax savings. Most simple calculators get this wrong and over-credit interest deduction for the full life of the loan.
The Down-Payment Opportunity Cost
This is the cost that buyers feel last and renters feel first. If you put $140K down on a $700K house and pay $15K in closing costs, that's $155K not in the stock market.
At a 7% real return, $155K compounds to:
| Year | Portfolio value |
|---|---|
| 0 | $155,000 |
| 5 | $217,400 |
| 10 | $304,800 |
| 15 | $427,400 |
| 20 | $599,300 |
| 30 | $1,180,000 |
The renter who never bought has $1.18M at year 30 from that initial outlay alone. The buyer's house also appreciated, but the comparison is: house value at year 30 (minus selling costs minus mortgage paid down) versus renter's portfolio value plus the year-by-year savings they didn't spend on housing.
This is why the answer often isn't "obviously buy" even in markets where home values rise steadily. The math has to clear two hurdles: home appreciation has to outpace stock returns and the year-by-year cash advantage has to favor buying (which it does in low-property-tax low-maintenance markets and doesn't in high-cost coastal cities).
Reading the Break-Even Distribution
A deterministic calculator gives you breakeven = year 7. A Monte Carlo gives you a histogram:
| Year | % paths where buying wins by this year |
|---|---|
| 3 | 12% |
| 5 | 28% |
| 7 | 47% |
| 10 | 73% |
| 15 | 86% |
| 20 | 91% |
| Never (within 30 years) | 9% |
If you're planning to stay 7 years, the buying-wins probability is below half. If you're planning to stay 10, it's 73% — still not a sure thing. The "never wins" bar — paths where the comparison stays in favor of renting indefinitely — is the path you should care about most: it's the worst case for buying, and at 9% it's a real possibility, not a tail event.
The Rent vs Buy Calculator shows this distribution explicitly. The single break-even number is the median of the column — useful as a rough benchmark, terrible as the answer to "should I buy?"
When Buying Almost Always Wins
A few patterns where deterministic calculators and Monte Carlo agree:
- Very long holds (20+ years) in markets with steady appreciation. Compounding home value beats portfolio + rent growth.
- Low property tax states with no SALT bite. TX, TN, FL — the cap doesn't hurt because property tax alone fits under $10K.
- High household income with full mortgage interest deduction over the loan life. Rare; usually means jumbo loan in a market with hefty depreciation history.
When Renting Almost Always Wins
- Short holds (under 4 years). Closing costs alone (5–7% of price round-trip) destroy the math.
- High-cost coastal cities with the SALT cap. CA, NY, NJ, CT — Monte Carlo paths skew renter-favorable past year 10 because of the cumulative tax-deduction loss.
- High-maintenance properties. A house with high HOA dues or known major repairs ahead can flip the math even in nominally appreciation-friendly markets.
The Honest Limitations
- Assumes US tax code. Other countries have different mortgage interest rules, no capital gains exclusion, and different property-tax regimes. Use as a rough framework, not a literal answer.
- Doesn't model property-tax reassessment regimes. California's Prop 13 caps reassessment at 2%/yr while you own; the calculator uses a simple effective rate. Long-time CA owners get a tax advantage the model under-credits.
- HOA dues are user-input, not state-modeled. Condo and HOA situations vary enormously; you have to put in your specific number.
- No rent-control modeling. Some markets have caps on year-over-year rent increases; the model uses a single rent-growth distribution.
- Doesn't model lifestyle and flexibility. Renting is more flexible. Owning ties you to one location. These aren't financial inputs — they're real costs and benefits that depend on you, not on the spreadsheet.
- Past returns ≠ future returns. The historical distributions used for appreciation and stock returns are not a guarantee. A regime change (higher rates, structural housing shifts, durable inflation) shifts the whole distribution.
Use the calculator to understand the shape of the decision. Use the shape to figure out where your own situation falls.
Related Tools
- Rent vs Buy Calculator — 5,000-path Monte Carlo with US tax modeling
- Mortgage Calculator — payment schedule and amortization
- Retirement Calculator — how the down-payment opportunity cost stacks against your retirement number
- Compound Interest Calculator — model what the down payment would be worth invested
- SIP Calculator — model the monthly rent-vs-mortgage difference as a recurring investment
TL;DR
The mortgage formula is exact; the buy-vs-rent decision is probabilistic. Monte Carlo with 5,000 paths gives you "73% chance buying wins by year 10" instead of a misleading single break-even year. The SALT cap costs CA/NY/NJ buyers ~$13K of deductions per year. The capital-gains exclusion ($250K single / $500K married) eliminates federal tax for most 5–15 year holds. The mortgage interest deduction only helps when itemized totals exceed the standard deduction. The down payment compounded at 7% is the hidden cost of buying. The Rent vs Buy Calculator runs the full distribution client-side so you can see the shape, not just the median.