Should You Buy or Rent? The Benefits of Owning Your Home
Hard work. Sacrifice. Time. These are things that we give in order to make an income to pay for the things we need, including the biggest expense most of us have - a place to live. Because everyone needs a place to live and the fact that it eats away the biggest portion of our paycheck every month, my goal is to help educate people on one of the most important financial decisions they can make: the decision to rent someone else’s home or to buy their own. So, what are some of the benefits of owning a home vs. renting one? For starters - owning a home forces you to save, provides tax benefits, and involves monthly payments that stay the same every year. Then, there are perks like appreciation and the ability to do with the property as you please. To truly understand why owning a home is a smarter decision than renting, it’s important to dig a little deeper into these benefits and get a better idea of how they might appeal to you.
Most Americans find it very hard to save for their future. With all of the expenses we have, how are we supposed to save as much as we should be? Many of us might get a percentage of our paycheck deducted and put into a 401k, an investment account that is used to save for retirement. By automatically taking the contribution out of our paycheck, it makes the saving process seamless and automatic. Taking out a mortgage for the purchase of a home acts in a similar fashion. You pay the mortgage payment every month (you can even have these payments occur automatically), and a portion of that payment goes towards paying down the principal of the mortgage. When you pay down the principal (loan balance) on the mortgage you are increasing the equity you have in the home, which is essentially your money when you sell the home. As time goes on, every mortgage payment you make pays down more of the principal and includes less interest. So, the longer you hold the mortgage and live in the home, the faster you will build up additional equity in the home. I like to imagine equity as a savings account that is simply tied up in your home until it is sold. Everyone needs a place to live and whether you decide to own or rent, you’ll have to pay for it. Why not choose the option that pays down your own mortgage, rather than someone else’s?
In addition to acting as a savings account and forcing you to save, owning a home provides several tax benefits. If the home is your primary residence you can claim a homestead deduction, which allows you to deduct 60% of the property’s assessed value or $45,000, whichever is less. Other tax deductions that owning a home allow are mortgage interest deductions, property tax deductions, private mortgage insurance (PMI) deductions in some cases, and more. Without getting into the details of these deductions, just know that owning a home provides many tax benefits that renting a home does not. To learn more about these deductions and how they are filed, you’ll want to talk with a tax professional.
Perhaps the most exciting benefit of home ownership, and my personal favorite, is appreciation. Appreciation is the concept that makes owning a home an investment, rather than a liability. Assets are investments, while liabilities are costs. Homes and cars are usually the two most expensive purchases the average person will make in their lifetime. Home values have historically increased in value, on average, while the value of a new car drops the minute you drive it off the lot and continues to lose value until the day it stops working. This reinforces the idea that homes are viewed by finance professionals as assets, while cars are viewed as liabilities. Since 1891 home values, on average, have increased 3.2% per year. This is important because it is higher than the rate of inflation, meaning your investment is growing in value even after inflation. Money in a savings account with today’s rate actually lose value every year to inflation. To give you an idea of how appreciation works, let’s run through a quick example. Let’s say you bought a house for $200,000 in 2009. It is now 2019 and you have decided that you want to move closer to your family, and you put your house on the market (with the help of an agent of course!). Your agent helps you discover that homes in your neighborhood are selling for $250,000, you list your house for that amount, and the home sells for the list price. That $50,000 increase in value from 2009 to 2019 is called appreciation and this appreciation, along with the other equity you have in the home from paying down your mortgage, is now yours. Pretty cool huh?
Financial advisors continue to harp on the importance of budgeting. Budgeting is easier than it sounds, especially when costs fluctuate on a yearly or even monthly basis. Here’s a bit of good news: almost all mortgages have the same monthly payment for the entirety of the loan. This also means no surprises when interest rates change as long as you have a fixed-rate mortgage, which are common. When you rent a property, the landlord has the ability to increase your rent every year once your lease is up for renewal (unless stated otherwise in the contract). So while you are working hard to try and save more money every year, your rent can increase and eat away at those savings. With a mortgage, you know exactly how much you’ll be paying every month, allowing you to budget accordingly. Even better news: you can own a home with the same (or even less) monthly mortgage payment as you’d pay every month in rent, making owning a home a much cheaper option than renting in the long-run as rents increase and your mortgage payment stays the same.
The last and most obvious benefit of owning your own home is that you are free to do with the property as you please. No more checking in with your landlord to ask him if you can paint the wall a different color or hang a picture somewhere. Owning a home gives you the right to decorate, renovate, and upgrade the property as you see fit. This not only allows you to create a space that reflects who you are and feels like “home”, but it also gives you the ability to invest in upgrades or renovations that can increase the value of the home. This may help your home sell for more when it is put on the market, so it’s important to do your research on what buyers are looking for in a home in today’s market. Your real estate agent should be able to help you with this.
After hearing about all of the benefits that owning a home provides, why would someone rent a property vs. own it themselves? I’ll be posting an article the first week of 2020 that will talk about some of the common misconceptions renters have that might be holding them back from owning their own home.
I specialize in helping renters move from renting to owning. Give me a call if you or someone you know wants to learn more about the benefits of owning your home. I’m more than happy to talk through these benefits and work with you to see how we can begin the process of finding you your dream home to OWN.
Talk soon!
Bailey Braunecker