We all hear and read about how much better it is financially to own a home rather than rent. But, why? What are the true benefits? Below, I’m going to lay out the top 3. As always, owning a home is not necessarily for everyone and each situation is unique. I do believe, however, that owning a home is one of the top ways to build wealth.
- Tax Deductible Interest and Property Taxes – For a true breakdown of this benefit, I advise consulting with an accounting specialist. In general, homeowners that itemize deductions on their tax return are able to deduct the mortgage interest and property taxes that they pay (typically up to $1 Million in mortgage debt) thereby reducing their overall tax burden. This is not a benefit that you necessarily notice each month when making your payment, however, it helps out quite a bit around tax time.
- Appreciation – The last 10 years have brought about some corrections in the housing market. Historically, however, many areas across the country have seen real estate appreciate (some more quickly than others). Oftentimes, this is the benefit that sneaks up on a homeowner. For a home that you purchase for $200,000 that appreciates 2% per year, if you were to sell in 10 years, the value of that home would be nearly $244,000. If you took out a mortgage of 80% of the value when you purchased ($160,000) amortized over 30 years at 4.5% interest, you would grow your equity in 10 years to $116,000 ($244,000 Value – $128,000 Loan Payoff = $116,000 Equity). The best part of this, under current tax laws, it is likely that you would be able to walk away with this sum without paying taxes on the gain. Again, seek professional accounting advice, this is meant to loosely illustrate some of the benefits.
- Equity Build Up – Each month when you make a mortgage payment, a portion goes to reducing the principal of the loan. This allows you to build equity (Home Value – Mortgage Balance = Home Equity). Renting does not have this feature as you’re not gaining ownership of a property that you rent. Over time, the equity that you are building continues to snowball and grow. Theoretically, by the time you choose to sell the home, you will have achieved equity by paying down the principal of the loan and realizing value appreciation of your property.