Since the Pandemic, homeowners with mortgages saw their home equity increase by 10.8% which is equivalent to a collective $1 Trillion in gains in equity! This is approximately $17K per homeowner on average. So why all the fuss about owning a home? Here are the top 5 reason why you should look to own a home!
Great Long-term Investment
Over time, home values on average increase over time this is called home appreciation. Home prices are cyclical and thus your home may not increase very much in the short-term, but if you wait a bit, it’s very likely you’ll be able to sell it at a profit in the future. According to the Federal Reserve Bank of St. Louis, the average price of homes sold in the U.S. rose from $340,400 in Q3 2014 to $382,700 in Q3 2019, a 12.4% increase in value in five years. This is even greater than the S&P 500 on average!
Home Equity
Home equity is the difference between what you owe on your mortgage and the value of your home. Initially, the majority of your mortgage payments will be towards interest, however as you pay your mortgage, more will be paid down for the principal. Unlike paying rent, all of your monthly payments are moving you towards owning an asset - an appreciating asset. Additionally, home equity gives you flexibility to get a loan based on the value of your home. Say you can get a home equity line at a 5% interest rate, but your investment opportunity can yield you 10% return, then you effectively have made 5% and without equity in your home, you would’ve missed out.
Capital Gains Exclusion
Eventually you may think about selling your home. When you sell a stock normally or any other asset, you typically have to pay capital gains taxes. Depending on your income bracket, you may have to pay up to 20% of the money you profit as capital gains from selling any other asset — However, with a home the IRS allows for a tax-free profit of $250,000 for single homeowners and $500,000 for married couples (if it’s your main residence). There are a few requirements that need to be met to qualify but they are mostly to prove it’s your primary residence when you sell the home such as owning the home for the last two years, you must have lived in the home for at least 730 days (two years) during the past five years leading up to the sale, and finally a look-back requirement to make sure you haven’t profited from selling another primary residence during the two year period leading up to the sale.
Tax Deductions
Probably the most well known and potentially lucrative benefit to homeownership is the tax deductions and savings that can be realized. Once you buy a home, you can deduct the expenses of owning that home from your annual taxes. This can include mortgage interest and depreciation (Depreciation is any decline in the home's condition as it ages) — this is how Donald Trump was able to theoretically pay $750 in Federal taxes even though he’s worth billions. I would recommend consulting with a tax specialist if you have any specific questions on your particular situation as there are many more intricacies to the US tax code I have not covered.
Forced Saving/Budgeting
Once you buy a home with a mortgage, you are in a sense forced to budget and save money to not only pay down your monthly amount but also the additional costs around maintaining and even improving your house. A famous psychologist once said that the meaning of life revolves around responsibility — and I agree. There’s something special when you own a little part of this world and can call it your own. That ownership can cultivate a sense of pride and meaning many of us really crave.
Ending thoughts and risks
I want to close and say that there are certainly some risks to homeownership. Like any other investment, you can potentially incur losses and typically a home requires you to live in one place for an extended period of time. This can mean not having the flexibility to move to another city or take that job opportunity in a new state. Just like any other monumental purchase, you must do your research and seek out advice from professionals! The bottom line is in order to set yourself up for success in the future, you need to start somewhere — reading this is a great start. Look out for my next piece on the steps to Homeownership where I go over the entire process step by step as I myself have purchased one!