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Buying a home can be a financial challenge, but for many people it’s one of the best ways to accumulate wealth over time.
In addition to offering possible tax advantages, homes build equity.
If you buy a home with a fixed, 30-year mortgage, you can lock in stable monthly payments. In contrast, renters face ever-escalating housing costs and receive no return on the money they spend.
Here are eight reasons it makes sense to be a homeowner:
1. Real estate appreciates
While there are no absolute guarantees in real estate, homes typically increase in value over time, which generally makes homeownership a sound investment.
In fact, Money Talks News founder Stacy Johnson — who has been investing in real estate for about 40 years — says real estate offers similar long-term returns to stocks.
As he explains the two investments:
“They usually beat inflation — both of them — by a few percentage points. Sometimes you’ll obviously be way better or way worse in either one. But generally speaking, over time, they’ll both do about the same.”
The people who lose money in residential real estate transactions often are buyers who try to make money quickly. If you plan to live in a home for at least 10 to 15 years, short-term drops in housing prices are unlikely to cause you to lose money.
2. You’ll be forced to save money
Because a mortgage requires monthly payments, homeowners are forced to “save” money each month.
“The biggest reason to buy a home is the forced saving aspect of having a mortgage,” says Los Angeles-based certified financial planner David Rae. “With every payment, you are putting some money away by paying down the mortgage.”
3. You’ll build equity
Making monthly mortgage payments also builds home equity. Basically, as you pay down your loan, your debt decreases, which in turn increases the portion of the home that you own free and clear — that is, your equity.
You can determine how much equity you have by subtracting the balance of your mortgage loan from your home’s market value. For example, if your home could sell for $300,000 and you owe $150,000, you’ll have $150,000 in equity.
When you sell your home, your equity effectively becomes cash — minus real estate agent fees and taxes.
4. You can avoid housing payments in retirement
Housing is the largest expense for households headed by someone age 65 or older — typically amounting to $15,529 per year — according to the U.S. Department of Labor. That’s about $1,294 per month.
The average retiree’s Social Security benefit, by comparison, was $1,417 per month as of September, according to the Social Security Administration.
As a homeowner, you can avoid all or some housing expenses in retirement, freeing up income for other uses. For help getting there, check out “7 Painless Ways to Pay Off Your Mortgage Years Earlier.”