Here’s something I wish I’d known in my early twenties: buying a home is one of the best ways to build wealth. In 2015, according to the Federal Reserve, the average homeowner’s net worth was $195,400, while the average renter’s net worth was $5,400.
Perhaps you know all of this already and are wondering if buying a home is still, in the current economy, even after the 2008 housing crisis, one the best wealth-building strategies. The answer to this question is yes, and here are a few reasons why.
1. Owning a Home Builds Equity and Forces You to Save
Home equity is an asset that comes from owning a home and represents one of the largest sources of net worth for most investors. In other words, equity is the portion of your home that you actually “own.” Of course, when you a buy a home you own all of it, but borrowing money to buy your property means that the seller still has an interest in it until you pay off the loan. Equity is essentially a form of wealth; you can eventually take out income or lump sum withdrawals from this asset, or you can pass it on to your children someday.
As you pay off your loan and as your home’s value increases over the years, your equity increases as well. Additionally, equity accumulates on both what you’re able to pay for your home, and on what you borrow. This means that, rather than earning appreciation on just your original down payment, you will build equity–and wealth–on the full value of the house, as though you had originally paid for it all upfront.
2. Market Prices and Your Home’s Value Increase Over Time
Speaking of appreciation, while fixed rate mortgage prices remain the same, market prices rise. Seattle area homes have some of the highest appreciation rates in the country; over the last ten years, Seattle real estate appreciated about 30 percent, which is an annual home appreciation rate of about 2.66 percent. You might eventually sell your home, and with Seattle’s appreciation rates and hot housing market, you will most likely make money when you sell.
3. Owning a Home Gives You Tax Benefits
Home ownership leads to several tax benefits, including mortgage interest deduction, which means that you can deduct the annual interest paid on a mortgage. As long as you own your home, you can also deduct property taxes. According to the Joint Committee on Taxation, property tax deductions saved millions of homeowners a total of $35 billion in income tax in 2016. Sounds pretty great, doesn’t it?
Last but not least, making energy efficient improvements to your home can also qualify you for energy tax credits.
Buying a home isn’t a “get rich quick,” scheme, because–like most real, stable wealth building–earning money through investing in real estate takes time. However, with some patience, home ownership can be extremely rewarding.