BEST INVESTMENT
Consumers who take advantage of this excellent buying climate to purchase a home will find that it is the best investment they ever made. Buying a home is the largest investment most families will ever make and homeownership is the single largest creator of wealth for Americans. It allows families to build financial security as the equity in their home increases. As home owners repay their mortgages, their debt declines, while overall wealth and equity in the home grow. Although local housing markets periodically adjust according to overall economic conditions, over the long term real estate has consistently appreciated. On a national level, home appreciation has historically risen 5-6 percent annually. Five percent may not seem at much at first, but take a look at the numbers. If you bought a $200,000 house and put 10 percent down, that would be an investment of $20,000. At an appreciation rate of five percent 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 $20,000. Your annual return on investment would be a whopping 50 percent. In contrast, putting the same $10,000 in the stock market and registering a similar five percent gain would only yield a $500 return on investment. The big difference in returns is a result of leveraging putting down a small amount of money to earn the biggest return. This is especially important for first-time home buyers. Entering the market now starts you on the road to home price appreciation. And the profit from selling a starter house will enable buyers with growing families to afford a bigger home in the future.
EVEN BETTER THAN STOCKS
Compared to other investments, such as stocks, a home is a relatively stable investment. Homes tend to increase in value at a steady, reasonable pace while alternatives can be extremely volatile. For example, during the stock market decline of 2001-2002, households lost more than $1 trillion in stock value, while their housing equity continued to climb. Looking at this another way and applying the power of leveraging, if someone put $10,000 into the stock market in 1996, the average annual S&P return would make that investment worth $21,500 todayan increase of $11,500. By comparison, the median priced home in 1996 was worth $140,000. Today, that same home would have gained more than $147,000 in value. And the real value of the investment is worth even more, because the homeowner has paid down a significant portion of the mortgage in the interim.
TAX SAVINGS
And dont forget the fantastic tax incentives. Its by far the biggest and best tax break for middle America. Collectively, home owners save nearly $100 billion annually on mortgage interest and property deductions alone. These tax incentives are designed to make owning a home more affordable. In most instances, all of the interest and property taxes you pay in a given year can be fully deducted from your gross income to reduce your taxable income. These deductions can result in thousands of dollars of tax savings, especially in the early years of the mortgage when interest makes up most of the payment. To look at this another way, if you are in the 30 percent tax bracket, you only pay 70 cents on the dollar in mortgage interest payments. Plus, the best tax break available to homeowners is when they sell their primary residence. A couple who own and live in their home for two years and then decide to sell can keep up to $500,000 of the profit tax-free. (A single owner can keep $250,000.) If the couple use these gains to buy a bigger home, and live in that home for at least two years, the same rules hold true when they go to sell again. This is one of the biggest tax advantages of homeownership and a great way to build household wealth.
BUILDING EQUITY FOR THE FUTURE
Owning a home is like investing in an automatic savings account. You accumulate savings in two ways. Every month, a portion of your monthly mortgage payment goes to the principal, reducing the overall loan amount. Each year, a greater percentage of your mortgage payment goes to paying down the principal. Second, your home appreciates over time, making it one of the very best financial investments. As your property appreciates, you build up equity in the home, increasing your household wealth. Many families elect to take out home equity loans to help put children through college, to purchase a second home, to make home improvements, to start a new business, to pay for medical costs or even to take vacations. And interest payments on home equity loans are fully deductible up to $100,000. By comparison, consumers who carry credit card balances cannot deduct the interest and can pay rates as high as 20 percent, more than double a typical home equity line of credit.
PRICE STABILITY
Owning a home provides price stability. While a rent payment can change substantially from year-to-year, you will have the same monthly payment for 30 years under a fixed-rate mortgage. 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 today are running near historical lows and not nearly as volatile as they were in the late 1970s and early 1980s. Knowing their mortgage payments will stay the same month after month provides households with a sense of financial security and also acts as a hedge against inflation.
FULFILLING THE AMERICAN DREAM
In summary, owning a home provides:
- The best investment
- A great tax benefit
- Financial freedom to send a child to college or provide a nest egg for retirement