The American dream of owning a home with a white picket fence may seem retro, however a 2016 study from the Joint Center of Housing Studies at Harvard University confirms that the American dream of homeownership is alive and well. Here are the top 5 reasons why owning a home is a good financial move:
- “Housing is typically the one leveraged investment available”- The common real estate purchase requirement is a 20% down payment for example $100,000 on a $500,000 asset. The buyer is using a small percentage of his money to make the purchase and the rest is provided by the lender. If the property appreciates 5% per year, the buyer’s net worth would grow to $525,000 in just 12 months. However, if the buyer bought a $100,000 property with $100,000 outright and assuming the same rate of appreciation, his net worth would only grow $5,000 over 12 months. The $20,000 difference demonstrates the concept of leverage and how it positively impacts a homeowner’s net worth over time.
- “You are paying for the house whether you rent or own”- Whether you are paying the principal on a mortgage or you are paying the principal to a landlord either way you are paying a mortgage to occupy a living space. Consider the lifetime cost of home ownership: let’s say you are an ambitious 25 year old who is buying a $225,000 house. Factoring in all the expenses if you live to be 80 years old the total cost of home ownership will be $923,000. However, if you are renting an apartment from a landlord and the rent remains stable for years, a comparative lifetime cost of renting would be $1.2 million. That’s right you are paying $277K more in this conservative example if you are a lifetime renter.
- “Owning a home is usually a form of “forced savings”- American culture is predisposed to instant gratification and mounting credit card debt. If you have trouble saving, making a mortgage payment every month will teach you some financial discipline and how to make saving a priority.
- “There are substantial tax benefits to owning”- There are tax advantages to home ownership such as mortgage tax deduction benefits such as closing cost deduction and property tax deduction, tax deduction on home equity lines, and capital gains exclusions. These advantages will add up to significant savings over time.
- “Owning is a hedge against inflation”- Housing and rent costs have gone up over time higher than the rates of inflation, making ownership an attractive proposition in varied economic conditions.
For Americans, home ownership remains a smart financial decision. From building net worth to saving money, owning a home is a good investment that stands the test of time.