There's a strong connection between homeownership and wealth, at least in the United States.
Consider this statistic: The median net worth of U.S. homeowners is $255,000. The same figure for renters is just $6,300, according to data from the Federal Reserve. And it's quite clear that homeownership is a big part of the difference.
But just how does homeownership build wealth?
There are several ways that owning a home can help someone build financial wealth, including tax advantages and long-term increases in home values. If you're interested in building wealth over the long term, owning a home is a valid strategy to help get you there.
Here are some considerations you should make when it comes to homeownership and wealth building.
Benefits of Owning a Home
As a homeowner, you don't just get to build stability and lasting memories in a place you can make your own; you can also experience financial benefits. Owning a home rather than renting can provide opportunities to save money on housing costs over time, as well as to experience long-term growth in an investment asset.
However, that's not where the financial benefits of owning your home stop. Here are some additional financial benefits enjoyed by homeowners:
Tax Benefits of Homeownership
The government encourages home ownership by offering tax advantages that can help offset the cost of owning a home.
For example, if you purchase your home with a mortgage loan, the interest you pay on that loan is tax deductible (for mortgages up to $750,000).
If you take out a home equity loan or home equity line of credit to make home improvements, the interest you pay on those is also tax deductible on your federal tax return.
Over time, the tax savings can add up, helping to make your mortgage payments more affordable when considered in the context of all your financial responsibilities.
Building Equity
In addition to saving money on taxes, homeowners can increase their wealth by building equity in their homes. Each month, part of your mortgage payment goes into paying off the principal portion of your loan. Over time, as you make monthly payments, you may build increasing equity in your home.
However, keep in mind that you'll only build equity if you're paying off your mortgage principal. If you have a loan with interest-only payments, you won't build equity in your home until you get through the interest-only payment period.
In addition to gradually paying off your mortgage and increasing your outright ownership of your home, you might also build wealth through market changes. When housing values increase in your area, your equity is worth more and you may gain more wealth upon the sale of your home. However, it's important to remember that if housing values decrease, the opposite is true.
What to Consider When Purchasing a Home
To leverage homeownership as a wealth-building tool, here are some important considerations.
Location, Location, Location
The location of your home is one of the biggest factors in determining its long-term value. Areas that are more desirable to live in tend to increase in value at rates higher than the national average.
Before buying a home, think about the desirability of the city or town, as well as the specific neighborhood.
Consider these local amenities that can influence a home's value:
School district quality
Transportation access
Proximity to parks
Shopping
Restaurants
Interest Rates & Market Conditions
No investor can completely predict the market, even when the investment is real estate. However, there are better times than others to buy a home.
When interest rates are soaring, you'll end up paying significantly more for your home over time compared to what you'd pay if you wait to buy when rates are lower. And if prices in the local market seem to be spinning out of control, it may be a good idea to wait until the market stabilizes.
Before making a commitment to a new home, carefully assess your financial situation to make sure that purchasing a home is the best choice for you and your family at the present time.
Size of the Home
A home's square footage will affect the overall price, so you may be able to save money by purchasing a smaller home that will still meet the needs of your family. Beyond square footage, consider the number of bedrooms, bathrooms and other amenities.
It's wise to find a home that will meet the needs of your family now and for at least five to 10 years to come. Keep in mind that a larger home will also come with higher bills for things like maintenance, heating and cooling.
Is Buying Property a Good Way to Build Wealth?
Becoming a homeowner can be a smart move to build wealth. Rather than making rent payments each month, your monthly payment will go toward building equity in a long-term investment. But buying a home isn't just about building wealth. It's also about establishing stability and connecting with a place you can call your own for years to come.
To find out more about buying your first home, visit our resources section.