Why Buying a Home is a Good Idea
The Best Investment
As a fairly general rule,
homes appreciate about four or five percent a year.
Some years will be more, some less. The figure will
vary from neighborhood to neighborhood, and region to
region.
Five
percent may not seem like that much at first. Stocks
(at times) appreciate much more, and you could easily
earn over the same return with a very safe investment
in treasury bills or bonds.
But take a
second look…
Presumably, if you bought a $200,000 house, you did
not pay cash for the home. You got a mortgage, too.
Suppose you put as much as twenty percent down – that
would be an investment of $40,000.
At an
appreciation rate of 5% annually, a $200,000 home
would increase in value $10,000 during the first year.
That means you earned $10,000 with an investment of
$40,000. Your annual "return on investment" would be a
whopping twenty-five percent.
Of
course, you are making mortgage payments and paying
property taxes, along with a couple of other costs.
However, since the interest on your mortgage and your
property taxes are both tax deductible, the government
is essentially subsidizing your home purchase.
Your
rate of return when buying a home is higher than most
any other investment you could make.
Income Tax Savings
Because
of income tax deductions, the government is
subsidizing your purchase of a home. All of the
interest and property taxes you pay in a given year
can be deducted from your gross income to reduce your
taxable income.
For
example, assume your initial loan balance is $150,000
with an interest rate of eight percent. During the
first year you would pay $9969.27 in interest. If your
first payment is January 1st, your taxable
income would be almost $10,000 less – due to the IRS
interest rate deduction.
Property taxes are deductible, too. Whatever property
taxes you pay in a given year may also be deducted
from your gross income, lowering your tax obligation.
Stable Monthly
Housing Costs
When
you rent a place to live, you can certainly expect
your rent to increase each year – or even more often.
If you get a fixed rate mortgage when you buy a home,
you have the same monthly payment amount for thirty
years. Even if you get an adjustable rate mortgage,
your payment will stay within a certain range for the
entire life of the mortgage – and interest rates
aren’t as volatile now as they were in the late
seventies and early eighties.
Imagine
how much rent might be ten, fifteen, or even thirty
years from now? Which makes more sense?
Forced Savings
Some
people are just lousy at saving money, and a house is
an automatic savings account. You accumulate savings
in two ways. Every month, a portion of your payment
goes toward the principal. Admittedly, in the early
years of the mortgage, this is not much. Over time,
however, it accelerates.
Second,
your home appreciates. Average appreciation on a home
is approximately five percent, though it will vary
from year to year, and in some years may even
depreciate.. Over time, history has shown that owning
a home is one of the very best financial investments.
Freedom &
Individualism
When
you rent, you are normally limited on what you can do
to improve your home. You have to get permission to
make certain types of improvements. Nor does it make
sense to spend thousand of dollars painting, putting
in carpet, tile or window coverings when the main
person who benefits is the landlord and not you.
Since
your landlord wants to keep his expenses to a minimum,
he or she will probably not be spending much to
improve the place, either.
When
you own a home, however, you can do pretty much
whatever you want. You get the benefits of any
improvements you make, plus you get to live in an
environment you have created, not some faceless
landlord.
More Space
Both
indoors and outdoors, you will probably have more
space if you own your own home. Even moving to a
condominium from an apartment, you are likely to find
you have much more room available – your own laundry
and storage area, and bigger rooms. Apartment
complexes are more interested in creating the maximum
number of income-producing units than they are in
creating space for each of the tenants.
If you
are moving to a home for the first time, you are going
to be very pleased with all the new space you have
available. You may have to even buy more "stuff."
copyright 2000 by Terry Light and RealEstate ABC,
revised 2002
