Should You Buy a House? The Benefits of Homeownership
The advantages of owning a home may not always be obvious, especially if you've got a decent rental situation and plenty of bills to pay already. Will the investment be worth the saving and sacrifice? To understand how homeownership can make a difference in your life, you may have to think a few years into the future, or even longer.
Is buying a house worth it?
The answer is usually yes. A home you own is more than just a place to live—for many people, it's a wealth generator. When you rent a home, your monthly rent helps your landlord pay down their own mortgage or make other investments. But when you own a home, your mortgage payment goes toward something you can later sell for a large or small profit. Research shows that homeowners generally come out ahead:
- The median net worth of homeowners in the U.S. is 80 times larger than the net worth of renters.
- The average homeowner has a household wealth of $231,420, compared with $5,200 for the average renter.
- The sooner you buy your first home, the better. Those who bought their first home between the ages of 25 and 34 gained the greatest housing wealth by their 60s.
So is buying a house a good investment? Homes are considered a safe investment overall. They tend to increase in value, so the longer you own your home, the more it will usually be worth when you sell. Of course, no investment is guaranteed, but there are ways to minimize your risk, which we'll cover later.
Probably the best reason to buy a home is your ability to build equity. You may have heard this term before—but what does it mean?
Home equity: the way to build wealth
When you have a mortgage, it serves as a kind of savings account. Each time you pay the bill, you're putting money into the "account" by paying down your loan. Over time, the percentage of the home that you own grows, while the percentage the bank owns shrinks. This amount that you own is called home equity, and equity is how you gain wealth through homeownership.
It takes time to build equity. One reason is that part of your mortgage payment goes toward paying interest on your loan, and not paying down the loan itself. The time it takes to build equity depends on your interest rate, other loan terms, and the conditions of the real estate market. Most people aim to own their home for at least a few years so they can make money when they sell it. But if you live in an area where the housing market prices are rising fast, you may be able to gain equity more quickly. Building equity and wealth sounds good. But what does that look like in real life?
Homeownership: the benefits of owning a home
To appreciate how home equity can change your life, you have to think about where you might be five, ten, or twenty years from now. Because even though homeownership often has advantages right away, the financial benefits tend to grow over time.
Here's how it works for many homeowners:
- When you sell your first home, you can use the proceeds as a down payment on your next home.
- With enough equity, you may be able to afford a pricier second or third home—one with more square footage or that sauna you've always wanted.
- You can use your equity to borrow money for home improvements or other big expenses.
- When you're older, you may choose to sell your house and use the money toward retirement, travel, or a child's college expenses.
- If you pay off your home, you can live rent-free and pass it on to any heirs.
The wealth you build through homeownership can improve more than just your own life. It can also benefit any children or other family:
- Families of homeowners tend to have more stable housing, more educational opportunities, and stronger community ties.
- Children whose parents own a home are more likely to own a home too one day.
All the benefits of owning a home, including the increased wealth it can bring, can carry over from generation to generation. When you buy a home, you have a place that's all yours. As you pay your mortgage bill and your home grows in value, you're building equity toward a strong financial future for you and your family. This is why the decision to buy a home feels right for many people.
How to make buying a house a good investment
Despite all the potential benefits of homeownership, there are also risks. A downturn in the economy or other unexpected event can reduce a home's value. Some mortgage loans can make it hard to build equity and put you at greater risk of foreclosure. Asking questions like "When should I buy a house?" and "What can I afford?" can help you avoid problems later down the road. Here are some tips for making your first home a good investment:
- Only buy a home you can truly afford. Sometimes when people lose money on a home, it's because purchasing the home was a stretch to begin with. If you don't have much savings left after buying a home and monthly payments are a struggle, a job loss or unexpected expense can put you at higher risk of falling behind on your mortgage.
- Beware any loan that seems too good to be true. Some programs will let you buy with a small down payment or even no money down. These can provide important opportunities to people who otherwise wouldn't be able to buy a home. But they can also come with major downsides, like high interest rates or a requirement that you stay in the home for a certain period of time. Make sure you understand all the details of your loan before you sign a contract.
- Buy when you're ready, not before. Take time to save the money you need, raise your credit score, or pay down debt if your lender recommends it or if it will help you manage your bills more easily. Getting pre-approved early can show you where you stand.
- Work with a real estate agent and lender you trust. A good agent will advise you on whether a home you're interested in looks like a good investment. A good lender will walk you through all your loan options, explain the pros and cons, and never pressure you. Make sure to talk with different lenders and shop around for the best loans and rates.
Originally published by Redfin