There are a lot of financial benefits that come with homeownership: you accumulate wealth, you receive special tax breaks, you save money in the long run compared to renting, and you build your credit along the way.
Most first-time homeowners aren’t entirely new to large financial obligations because they’ve already invested in college or a new car. But from a financial standpoint, homeownership comes with a whole host of unique benefits and responsibilities.
So let’s talk about what you need to know about growing your wealth through homeownership. (Don’t worry, it’s not as intimidating as it sounds).
How Does Owning a Home Build Wealth?
One word: equity. A big advantage of owning a home is that you build equity as you make your monthly mortgage payments.
A good way to think about equity is this simple equation:
Assets – Liabilities = Equity
In terms of real estate, the asset part of the equation is your house. And it’s important to note that your house’s worth is not what you paid for it–it’s the market value.
The liability is what you subtract. In this case, it would be the amount you still have to pay on the mortgage.
So, as you make your monthly mortgage payments, you’re tipping the equation in your favor. As you lower the principal (the amount you owe), your liabilities get lower and lower, bringing that equity closer to the full value of your home.
Improving your home equity is great for a lot of reasons. You’re making payments to someone else, sure, but those payments are increasing your financial profile because you have more in the way of assets.
You also have the option to borrow against the value of your home. Called a home equity loan, these are used for large amounts of money typically needed for things like renovations or college tuition. They’re a good option because the interest rates are generally lower and they’re easier to qualify for because your home secures them.
Apart from equity, homes can help grow your wealth by appreciating in value. Of course, there’s no way to predict the housing market and there’s no guarantee your home will be worth more 30 years down the road. But many people still believe owning a home is a good investment. It’s a physical asset that can’t “disappear” like stock profits.
What Are the Tax Benefits of Owning a Home?
You can deduct a lot of your costs associated with buying and owning a home. The most common are:
- property taxes
- mortgage interest
- home equity loan interest
- local property taxes
You end up saving a decent amount on taxes when you have a home of your own, especially compared to the almost nonexistent tax breaks for renters. That’s one of the advantages of owning a home versus renting.
The Benefits of Owning a Home Versus Renting
The main financial benefit is that it’s generally less expensive to buy a home than it is to rent in many cities.
Of course, as with all things housing-related, there are about a hundred different viewpoints on the subject but in general, buying a house can be cheaper in the long run.
Look at it this way: for a 30-year fixed rate mortgage on a $100,000 house at, say, 5% interest, you would pay around $193,256. By contrast, if you were renting a $600 per month two-bedroom apartment for 30 years, you would pay about $216,000.
Now, that doesn’t take into account the maintenance costs or construction projects that come with owning a home. A perk of having an apartment is that you don’t have to worry about those things.
But taking care of your own maintenance isn’t a bad thing. Say your windows need replaced because they’re so ancient and drafty, they might as well be open in the winter. In an apartment, your landlord might never get around to replacing them if he or she doesn’t see fit to do so. But in a home of your own, you can get new energy efficient windows that hold in the heat, lower your utility bill and make you eligible for a tax break.
The biggest (and most obvious) benefit is that once you’re finished paying off a house, it’s yours. When you rent, you could make payments your whole life and not have a tangible return on your investment. Buying helps grow your wealth in a way that renting doesn’t.
Just make sure that you can afford the house you have your eye on. You can use mortgage affordability calculators to give you an idea of what you can afford given your annual income and monthly debt payments. You don’t want your credit to take a hit by missing mortgage payments because owning a home should help you build credit, not lower it.
Building Credit with Homeownership
Owning a home is a great way to build credit. That may seem counterintuitive because you’re taking on such a large loan, but having a mortgage builds payment history. It’s considered “good debt” because there’s a tangible asset standing behind it in the form of your house.
How does building credit help save you money and build wealth? Well, if you have great credit you get lower interest rates on credit cards and loans (and maybe even better car insurance rates). Lower rates on those things means more money in your pocket.
Mortgages: Big Investments, Big Rewards
It’s a big responsibility, but owning your own home means a big improvement to your personal wealth. Be sure to take these benefits into consideration when you’re thinking about buying. And remember, it all comes down to whether you’re in a financial position to make the move to a home of your own.
Ready to make the leap? We’re here to help. For mortgage guidance, questions, and needs, contact Mercer Savings Bank. Feel free to give us a call at 877.672.4543 to speak with a mortgage loan officer, fill out our online mortgage application or visit a Mercer Savings Bank location near you.