Owning a home offers advantages that can help anyone build wealth. Of course, without a crystal ball, it’s impossible to know exactly what your home purchase will do for you long term, but there are some consistent historical indicators of how homeownership relates to wealth.
1. Stable housing payments. Apartment and home rents tend to go up over time, and if you move around a lot, you can’t predict what your housing costs will be down the road. In general, your mortgage payments stay consistent over the life of the loan, although there may be some variations when property tax rates or insurance costs change, or if you enter a new term of an adjustable-rate loan. This predictability helps you know how much you can comfortably invest in other wealth-building vehicles, like a retirement plan.
2. Home appreciation. While the housing market can be unpredictable in the short term, it has historically yielded solid results in the long term. On average, American homes usually double in value every 10 to 20 years, and in some locations, they increase much faster.
3. Tax advantages. If you itemize your taxes, you may be able to deduct the mortgage interest and property taxes you pay (up to a certain limit), as well as private mortgage insurance (PMI). You may also qualify for tax credits if you’re a first-time homebuyer or if you make energy-efficient improvements to your house.
4. A hedge against inflation. In the simplest terms, inflation occurs when the cost of living goes up faster than wages. When inflation goes up, the cost of everything increases — including housing. If you have locked in an interest rate on a home, then you don’t have to worry about rising housing costs, whether that’s in the form of higher rent or increasing home prices. And, since you’re investing money into an asset that typically appreciates over time, you’re putting your money to work for you.
5. Equity. Equity is the difference between what you owe on your house and what it’s worth. We’ve talked about how houses typically appreciate (go up in value) over time, so it stands to reason that as you pay off your mortgage, your equity goes up. This can potentially be a big payoff when you eventually sell your house!