Best Loan Programs for Financing an FHA Approved Condo
The dream of owning a home offers many opportunities that aren't available to renters. A New York Times editorial in 2014 focused on the importance of home ownership to build wealth, which drew on extensive research from the Joint Center for Housing Studies at Harvard University.
The study concluded: For building wealth, there is no substitute for home ownership. Why? Read on to learn why you need to buy a house to build wealth as soon as you can.
#1 Mortgage Makes You Save
Buying your home with a mortgage, as most people do, forces savings via monthly paying of principal on the loan. Most rent or buy arguments focus simply on the level of the monthly payment, and also that the cost of buying is both the monthly mortgage payment and insurance and property tax payments.
Remember though that the monthly mortgage payment has both interest and principal payments. The way the payment pay off interest and principal will change over time. More interest is paid at the start of the loan. The longer you hold the loan, the more your loan payment is paying towards principal. So, paying principal on the loan as it matures is a forced savings plan where the deposits grow over years – without taking more money out of your account.
#2 Appreciation Over Time
If you have paid attention to home prices in the last 10 years, you know that we have seen abnormal increases in prices and also abnormal declines in prices. Even with these major fluctuations considered, the annual return of home prices has been above inflation by 1% or more. This means that even when there are years where home prices increase or decrease more than normal, home prices still increase faster than inflation over the years.
The increasing values also compound over longer time periods. For instance, the Harvard study we mention above highlights if a home owner had an average gain in the price of the home from 1975-2012, the owner would see a gain adjusted for inflation over 26%! So, after being adjusted for inflation, at the end of the 30 year fixed mortgage, many homes will be worth 26% more in current US dollars.
#3 Buying with Mortgage Increases ROI
If you put down only 5% down and have 4% annual inflation, after five years the house is worth 22% more! That is five times more than you put down. You do not see many investments with that good of a return.
#4 Major Tax Benefits
Most homeowners enjoy major tax benefits in the form of the mortgage-interest deduction. This allows them to deduct the annual interest paid on the mortgage and also the annual property taxes. Further, large gains up to $500,000 are fully exempt from capital gains taxes when the home is sold.
#5 Protection from Increasing Costs
Home prices usually increase faster than inflation. This is because prices increase over time. Buying a home with a mortgage loan, however, usually provides more protection from rising rents. A home mortgage locks in your monthly housing cost for years. As time passes, the monthly payment stays the same. However, because of inflation, the cost really goes down. So, over time, a homeowner pays a smaller share of their monthly income on housing.
According to the Harvard study, if we have a 30 year fixed rate mortgage with 3% inflation and 1% growth in home prices, the monthly housing cost would drop by 10% after 60 months. It would drop 15% after a decade and 30% by the final year on the loan. On the other hand, renting has a less pleasant outcome over the long term. Rents usually at least keep pace with inflation so a household that rents for years will never see their housing costs go down.
#6 Access to Home Equity
As your home appreciates in value over time, equity will grow in the house. These are funds that you can tap for a variety of expenses and other opportunities that can grow your wealth. If you have decent credit scores, you probably will be able after a few years to do a cash out refinance or take out a home equity loan on your property. People with good credit may be able to borrow capital from their home at 3% or less.
This money can in theory be used to invest in other real estate property, which can add to your wealth over time. Investing in real estate with home equity from your personal residence needs to be done cautiously, as a poor investment can result in serious negative consequences for your personal wealth. Still, many successful investors pull equity out of their home to invest in profitable real estate that generates monthly cash flow.
Owning a home truly is the best way for most people to build wealth over the long term. While renting a home temporarily is perfectly fine, most people will build their wealth faster with home ownership.
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