Buying a home is, without a doubt, a huge financial and life-changing decision. As such, most young-ish people start out renting for a while before putting down roots and purchasing a home of their own.
Of course, there are plenty of good reasons for young people to rent: mobility, a carefree lifestyle, and attractive amenities like pools and gyms. But if you were to do the long-term analysis of the financial comparison of owning vs. renting? It’s a no-brainer.
Here are some of the advantages of buying a home:
When you purchase a home, it’s an investment in more ways than one. It represents a commitment to your community. Why do people make their homes and yards look great? For one thing, it reflects on the whole neighborhood. And our participation in the community is a large part of the ‘value’ we receive from home ownership.
Your home is your castle and you can make it whatever you want it to be. From paint and floor coverings to complete remodeling, your house is yours to do what you please. Well, within reason, of course. But it’s you making those decisions rather than a landlord.
A mortgage payment has two components: Payment on principal (which actually reduces the amount you owe) and payment on interest (which is the ‘cost of money’ that you borrowed to purchase the house). At the outset, your payment on interest is greater than your payment on principal, but your mortgage payment still results in building equity in the investment.
Over the term of the loan, the ratio of interest vs. principal reverses, and you gain more and more equity. This can be thought of as savings, but only in the sense that you realize it when you sell the property. Also, in comparison to other types of investment, property appreciation historically results in a greater return than, say, a stock or mutual fund. Plus, you get to live in your investment!
For many people, tax benefits are mentioned as the number one reason to own a home. And it’s true! Mortgage interest is deductible on your federal taxes, along with some initial expenses (such as closing costs) as well as ongoing ones (like property taxes). These deductions often amount to reducing your actual expenses by hundreds of dollars per month. Savvy homeowners can use this to adjust their salary tax withholding to take advantage of real cash flow. Now there’s a bottom line benefit we all understand!
The most common form of home financing is a fixed rate mortgage. This means your payments remain the same for the entire life of the loan (unless you refinance, or use a home equity instrument). As such, your housing budget remains relatively constant compared to what might happen to rental payments over, say, 30 years. Insurance and taxes may increase (your home gains value, by the way) as time goes on, but remember that property taxes are deductible.
It may seem as if you’re saving money by paying less in rent, right? But that’s not really the case. Over time, rent is likely to rise; but a fixed-rate mortgage payment (1) doesn’t change over the period of the loan, and (2) provides you with the benefit of tax deductions and reducing your overall cost significantly. The better value, in the long run, is definitely purchasing a home.
Buying a home may seem a little intimidating, at least at first. Of course, it’s a big commitment. However, as time goes on, your home increases in value, you get a great tax benefit, and, almost always, your income increases, giving you a lot more ‘comfort zone’ in your budget. With all these benefits, it’s easy to see why a home purchase is a great deal!