Did you know the median net worth of homeowners is 80 times more than renters?
Homeownership is a great way to invest in your future.
When you buy a home, you’re investing in a property that will hopefully appreciate in value, allowing you to either sell or refinance for more than you paid. It may be a lot of money upfront, but over time, and maybe even over generations, you will see the return.
How does homeownership build wealth? Let’s discuss all of the ways that homeownership builds wealth.
Homeownership is an investment
First and foremost, your home is your investment. You’ve paid a certain amount into it and over time, that amount plus more can return to you. Let’s break it down.
You bought a house! You’ve secured a mortgage loan for $150,000. By making your loan payment every month, you’re building equity. Equity is simply the difference between your loan amount and the home’s worth.
Homes typically appreciate in value over time. So in this scenario, your home loan is $150,000 and the home is currently worth $175,000. That means you have $25,000 of equity in the home. You can then sell it or refinance for more than you paid for it since it is now worth more than when you originally purchased it.
In a way, your home is serving as a savings account. You’re paying into the value of it each month so that you can eventually get more than that initial amount back.
Low interest rates lead to more principal payments
Getting a low interest rate will help you build wealth through homeownership.
If you’re paying less in interest each month, you have more money to contribute to your principal payment. As we learned above, paying more into the value of the home will help you build equity over time.
Family wealth builds through homeownership
It’s common practice to keep houses in families and a great way to continue building wealth through generations.
A house can be passed down to the next generation, who can then sell it for a profit. Family members could also purchase houses from each other at discounted prices, allowing them to easily build equity. There are a variety of ways that homeownership helps families build wealth.
Your homeownership also encourages your kids to become homeowners. The rate of children who grow up to own homes is 8.4% higher for those whose parents were homeowners, than for children of renters.
It makes sense to start investing early so that investments have more time to appreciate. This can also help you show your children the financial skills necessary for homeownership while they’re young, which can set them up for success in the future.
Homes offer a chance to make your money back
It costs a lot of out-of-pocket money to buy a house. Closing costs can run you anywhere from 1-5% of the home’s price, depending on your state. But luckily, homeownership offers you a chance to make that money back, unlike renting. It’s a lot upfront, but if you stay in your home and with your loan for long enough, you’ll end up making that money back.
Let’s say you purchased your home for $140,000 and have stayed there long enough to pay the loan off. The value of the home has now appreciated to around $150,000. Couple that with a competitive market that could result in a bidding war in the sale of your home, and you could be looking at a sale of $165,000. A return of $25,000 on top of your original investment is surely enough to make up for those closing costs that you originally paid.
Buying a home offers tax benefits
Other investments sometimes require a capital gains tax on any return that you make, depending on your taxable income. The profit you make from selling a home, however, cannot be taxed if the amount is $250,000 or less for a single borrower (double if you’re married and you both own the home).
Other tax advantages of homeownership include deductions on the following:
- Mortgage interest
- Mortgage discount points
- Mortgage insurance
- Property taxes
Owning a home is reliable
If you have a fixed interest rate mortgage, you can almost always count on your mortgage payment to be the same amount each month. If you have an adjustable-rate mortgage, the changes in payment amount will be clearly defined upfront.
Whereas renters are at the mercy of their landlords or management company, who can raise their rent at any time. A consistent payment means you know how to budget each month, allowing you to maximize your income, as well as paying down your debts.
The housing market dips just like anything else, depending on the economy, but has historically always recovered, making it a stable investment market.
Start building wealth through homeownership
It is through all of these ways that homeownership builds wealth.
While maintaining your property the best you can also certainly helps, a real estate investment (whether it be your dream house or for business) is a great, hands-off way to build some capital.
The property you buy today could set your family up for generations of success.
It’s never too late (or early) to start your homebuying journey. Homefinity’s experienced loan officers are ready to answer any of your questions about homebuying to help you get on the right path.
The information contained herein is distributed for educational purposes only and is not intended as tax or financial advice. Homefinity does not guarantee a mortgage loan will result in equity gains or tax advantages. Any potential benefits from homeownership are based on individual factors. Contact your Homefinity loan officer for more information regarding your specific situation.