Disclaimer: I am NOT a finance or mortgage professional. As a Realtor, I work closely with mortgage lenders and know a lot about the financial side of buying a home, but I’m not licensed to give financial advice. This page is a great starting point, but you should talk to a licensed mortgage lender if you want to learn more. (Finding a mortgage lender… now THAT I can help you with!)
If you’re reading this page, you’ve probably already done a little research about buying a home. And you probably know that buying a home is a smart financial decision. It’s true: Buying your own home (instead of renting) will probably save you money… both in the long run, and on a month-to-month basis. But, it’s definitely not obvious why. Hopefully I can help with that!
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Owning your home has a bunch of financial benefits that renting a home does not, even if you take out a big mortgage loan to do it. Here are the top 5 financial benefits that homeowners enjoy, just by virtue of owning their property:
1) Mortgage interest deduction on your taxes.
This is a huge deal. Basically, the IRS gives you a break on your taxes if some of your income is going toward paying the interest on your mortgage loan. When you file your taxes, you get to deduct the amount of mortgage interest you paid that year from your taxable income. That doesn’t mean you get that amount of money back… It means you are taxed as if you never made that money in the first place. In other words, the dollar amount you have to pay in taxes will be lower, since you aren’t being taxed on all of your income.
Bottom line: Even if your monthly mortgage payment is exactly the same as your rent payment used to be, you will have more take-home money, because you are paying less in taxes.
Here’s an example. (For the sake of simplicity, let’s pretend there aren’t any other tax variables.) If you make a salary of $80,000 and you rent your home, you have to pay income taxes on your entire salary. But, if you own your home and paid $8,000 in mortgage interest during that tax year, you will be taxed as if you only made $72,000 in salary! And, depending on some other factors, you might even be bumped down to the next lowest tax bracket. That’s a big chunk of change back in your pocket at tax time!
This has been in the news lately, since the new tax reform law made some changes. But, if your mortgage loan is $750,000 or less, you’ll get the same amount of tax deduction as you would have before the new law. And even if it’s above $750,000, you still get the benefit on the first $750,000 of your loan.
2) Building equity.
Every month, a portion of your mortgage payment goes against the principle of your loan. So, over time, you owe less and less money on your mortgage. You can think of this as contributing to a savings account each month. When it comes time to sell your home, you will have that much more in proceeds that you can use to buy your next place (or boat, or sports car, or whatever).
Here’s an example. Suppose you bought a $400,000 condo, and your down payment was $40,000. That’s 10%. Your mortgage loan, which covered the other 90%, would be for $360,000. Over the next 30 years, you are paying off that loan. If your interest rate on your mortgage is 4.25%, your monthly principle and interest payment comes to $1,771. This is exactly how much you will pay in interest and in principle, for each of the first 3 years owning the condo:
Year 1: You paid $6,069 against the principle, and $15,183 in interest.
Year 2: You paid $6,332 against the principle, and $14,920 in interest.
Year 3: You paid $6,607 against the principle, and $14,645 in interest.
(Notice: The proportion of principle vs. interest shifts slightly each year! In the beginning, your payments are mostly going toward interest. By the end of your loan, your payments are mostly going against the principle of the loan.)
By the end of Year 3, you’ve paid $19,008 against the principle, so you have $19,008 more in equity than you did when you first purchased the home! Add that amount to the original $40,000 down payment, and you have $59,008 in equity! (That’s not even accounting for any appreciation in value… which would also count as your equity.)
By the way, in this example, look at the other number…how much money you paid in interest in a given year. That’s the same number you get to deduct from your income taxes at the end of that tax year. Cha-ching!
3) Housing costs stay the same.
If you get a “fixed-rate mortgage,” that means your mortgage interest rate will never go up. So, when you take out your mortgage loan, you know exactly how much you are going to pay in principle and in interest, every month for the rest of the loan (probably 30 years).
Your mortgage payment will also include your real estate taxes and your insurance. Those amounts might go up a little bit over time, so your total monthly payment might change slightly. But, it’s nothing compared to if you were renting for the next 30 years! Rent amounts tend to increase by about 3% every year. Over just five years, that would be an increase of almost 16%!
4) Financial security.
One day you may need to borrow a large sum of money: to pay medical bills, or to go back to school, or to loan your own kid money for their down payment. Life is a roller coaster… there are so many circumstances that could necessitate a loan!
If you are a homeowner and have enough equity in your home, you can take out a loan against that equity. This is called a Home Equity Line of Credit. The longer you live in your home and the more equity you build, the more money you will be able to borrow against your equity.
If you simply want more cash flow every month, you can also “refinance” the remaining balance of your mortgage, and turn it into a brand new 30-year loan. That would lower your monthly mortgage payment.
5) Appreciation (maybe).
No one has a crystal ball, so we can't assume the value of your home will increase by the time you want to sell it. But, if that does happen, it's an added plus!
There you have it! These are the 5 major financial benefits of home ownership. There are definitely other benefits… especially tax benefits. But, those are more complicated and you don’t need to learn about them today.
But what about renting?
It’s worth noting that there are downsides if you keep renting, aside from the literal inversion of the benefits I mentioned above. Here are the main ones:
1) Rising interest rates.
We still have historically low mortgage interest rates. As I’m writing this, they’re in the low 4%’s. The historical average is something around 8%. It’s even been as high as 18% at one point!
If you keep renting but intend to buy one day, you might be facing higher interest rates when you do decide to purchase a home. That means you will pay more money in interest over the life of your mortgage loan.
There’s a more immediate consequence, though: As interest rates go up, you won’t be able to qualify for as big a loan in the first place. That’s because your mortgage lender is looking at how much you can afford to pay for your mortgage each month… and if you owe more in interest every month, then you have less money to pay against the principle of the loan.
2) You could be forced to move.
This one’s pretty self-explanatory. Moving sucks. Especially when your landlord is kicking you out… because they want to sell the property, or live in it themself, etc.
3) You’re still paying a mortgage – but not your own.
Chances are your landlord has a mortgage on the property you are renting. So, they are getting all the financial benefits I listed above… but you are the one paying for it! Ugh!
The financial case for owning your home is pretty strong. However, buying a home is not just about the money. You have to be there emotionally, too. You have to want to stay in this area for at least a few years, and be comfortable keeping up with home maintenance. And, you need to know you’ll keep getting a paycheck and paying your bills. If you can check all those boxes, it might be time to think about what you want in your future home!
(If that's you, check out this one-page checklist for how to buy a home.)
Thanks for reading,