Homeownership isn’t just about having a great kitchen, extra bedrooms, a man cave, or whatever else is on your wishlist. For most people, buying a home is their biggest opportunity to build wealth for themselves and their families.
Let’s start by talking about wealth-building. Your net worth is the total market value of all the assets a person has, minus their debts. In a study released in 2019, the U.S. Census Bureau said that the wealth inequality between those who own homes and those who rent was “striking.”
Striking may be an understatement. Using data from 2015, the study found the median net worth of homeowners to be $221,000, compared to $2,760 for renters. In other words, U.S. homeowners have (on average) 80 times more wealth!
So why do most homeowners build so much more wealth than renters? Here are three big reasons:
- A house is like a savings account. With every monthly payment, you are depositing money back into your home and building equity. And given the value of real estate as an asset, this investment tends to gain significant value over time. Between 1994 and 2019, U.S. homes appreciated by 3.9% annually (on average) in the 25-year-span from 1994 to 2019, according to Black Knight, a real estate analytics company.
Some years, we see much greater appreciation in the market. Last year alone, American homeowners saw their equity grow by 16.2% (on average), according to CoreLogic, which also collects and studies real estate data. (This was the highest annual jump since 2013!)
Landed's Principal Broker and Compliance Lead, Angie Kearns.
- You can lock in your biggest home expense. If you set up a mortgage with a fixed payment, you no longer have to worry about landlords raising rent each year. At first, making the commitment to buy can be scary for some, but you’ll soon appreciate that mortgage payment as you see rents increasing around you. Over the long term, it’s hard to avoid the effects of inflation on most consumer costs. However, when you buy with a fixed mortgage, you keep inflation from driving up what is likely your biggest monthly expense –– your home. This means not only long-term savings, but also allows you to put more of your income toward other financial goals, such as saving for retirement.
- You get a tax break. Who doesn’t love paying less in taxes? To start, the closing costs that you pay on closing day are a tax deduction. Then, the interest you pay on your mortgage can be a tax write-off every year. While this doesn’t mean your taxable income will be reduced by the same amount you paid in interest, it may lower your taxes (depending on your tax bracket and other factors).
The bottom line is that a home can be a fabulous investment that helps you build wealth and financial security… But it’s true, you’ll also get to pick your own paint colors, add whatever you want to the walls, and even take on a renovation project when the time is right! I’ll admit it, it’s nice to have a wishlist after all :-)
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