The decision to buy or rent your home can be challenging. Homeownership has traditionally been an important way to build wealth. A view held by the majority of Americans: 84% believe that buying a home is a good financial decision.1
Here are four reasons why purchasing a home can be a smart financial decision.
Build personal wealth
The most recent Survey of Consumer Finances showed that the average homeowner has a household wealth of $254,900, while the average renter has a household wealth of $6,270. This means that the net worth of a homeowner is over 40 times greater than that of a renter!
Homeownership rates peak at or near retirement ages, suggesting that buying a home provides long-term financial stability and the foundation for a comfortable retirement.
Build equity and increase your net worth
When you rent a home, your monthly payments can help you build credit. However, your rent money is going to your landlord. When you own a home, your monthly mortgage payments enable you to build equity over time, which increases your net worth.
Over the past ten years, the median-priced home in the U.S. gained $190,000 in value, making the typical homeowner 40 times wealthier than if they had remained a renter, according to a new report from the National Association of REALTORS®2.
- Low-income homeowners who earn less than 80% of their area’s median income saw $98,910 in equity gains
- Middle-income homeowners (those making more than 80% but less than 200% of median area income) saw their properties appreciate by 68%, increasing their wealth by $122,070
- Upper-income households who earn more than 200% of their area’s median income accrued $150,810 in equity.
Along with the wealth gains these homeowners accumulated through price appreciation in the last decade, their debt has already dropped by 21%. This is because homeowners pay the same amount for their monthly mortgage payments, but the loan principal is reduced with every payment. In comparison, renters across the U.S. have seen year-over-year increases.
Homeownership increases your net worth in two ways
- Paying your monthly mortgage payment pays down the mortgage loan debt each month
- Home values increase over time, so homeowners build wealth from the appreciation of their property
Stable housing payments
Rent payments for a single-family home increase, on average, 3-4% each year.3 Buying a home with a fixed-rate mortgage will enable you to lock in the interest rate, so your monthly mortgage payment will remain the same for the duration of your mortgage term. If interest rates drop, you can refinance to further reduce your monthly mortgage payment.
In the tax world, there are deductions, and there are credits. Credits represent money taken off of your tax bill. A tax deduction reduces your adjusted gross income, which in turn reduces your tax liability.
Most of the favorable tax treatments that come from owning a home are in the form of deductions. Mortgage interest, real estate or property taxes, Private Mortgage Insurance (PMI), and other origination fees may be deductible on your income taxes. A professional tax accountant can advise you on how to deduct these payments.
Some states and counties offer a reduction in annual property tax through the Homestead Exemption program if the house is your primary residence.
Learn how to file for a Homestead Exemption.
1 National Association of Realtors Housing Pulse Survey
2 National Association of Realtors “Wealth Gains by Income And Racial/Ethnic Group”
3 CoreLogic Single-Family Rent Index