Why Is Home Buying a Key Personal Investment?

It is considered a truism that owning a home is a better financial option than renting. After all, the logic goes, why should you pay your landlord’s mortgage when you can pay your own? Intuitively, it feels true, but how true is it—and how do we really know? The value of homeownership is two-fold, including both financial benefits and intangible differences that encourage better financial, educational, and professional habits. These can pay dividends in a variety of ways for generations to come. Analyzing statistics associated with homeownership allows you to determine that buying a home isn’t just a good idea—it’s an essential part of personal wealth building and management.

Financial Benefits of Home Ownership

According to the Federal Reserve’s 2020 “Survey of Consumer Finances,” a homeowner’s net worth is more than forty times greater than that of a renter. Setting aside the value of the home itself, how does homeownership create such an impact on wealth-building? The following are just a few of the ways that homeowners benefit financially from their investment in real estate.

Forced savings strategy

Your initial investment, in the form of a down payment, along with consistent monthly mortgage payments, offers a relatively painless method of forced savings. While providing a home for yourself and your family, you are building equity in your home month after month. Over the long haul, even without taking into consideration any potential appreciation, you’ve saved tens or even hundreds of thousands of dollars that can be held and passed on to your heirs, accessed through a home equity line of credit or loan, or recovered through a home sale.

Home value appreciation

The long term pattern for home prices is upward, with differing rates of appreciation in different years and in different parts of the country. Home values tend to rise year over year, offering a steady and, for the most part, reliable return on investment. Smart updates, upgrades, and improvements can create even more appreciation, allowing you to maximize your home’s value and market appeal.

Fixed interest rates

Compare home buying with a fixed-rate mortgage to renting over a 30-year period. With the likely potential for annual rent increases, renters will experience much higher home costs during the same period, while the buyer’s largest expense remains essentially fixed despite inflation and changes in the home’s total value. That means that today’s mortgage payment may feel like an outright bargain decades from now. Add to these fixed rates the current historically low interest rates on offer and you have a powerful financial incentive to begin your home purchase process sooner rather than later.

Tax advantages

Mortgage interest paid along with property taxes and some specific improvements, like those associated with energy upgrades or medical requirements, provide significant tax deductions. You’ll save even more on your taxes if you’re working from home in a dedicated office space. This allows you to deduct expenses associated with both finished and unfinished space, depending on your office and storage space requirements.

Building inter-generational wealth

While homeownership is associated with a personal increase in net worth, it also provides significant financial resources to your heirs. Since inherited homes are taxed at their stepped-up, fair market value, your heirs will not have to pay capital gains tax on the property’s appreciation. That means that you both will be able to take advantage of the tax-sheltering benefits associated with owning a home.

Intangible Benefits of Home Ownership

Once you get beyond the dollars and cents benefits of owning a home, you find that there are also less-obvious intangible factors at play, allowing homeownership to contribute to increased net worth and financial security. These factors can help create additional good habits and long-term perspectives that pay dividends in a variety of ways.

Increased stability

When you’re renting, you are subject to a variety of factors that may discourage you from staying in one place. Rent increases, inadequate property management, and even unpleasant neighbors may make it easier for you to look for a new place than to stay put. Homeownership, on the other hand, encourages stability, helping you put down roots and providing a sense of permanency and security for your family.

Investment mindset

In many ways, homeownership teaches you the value of money. As you see your home value and equity increase over time, you internalize the value of investing, which can impact your willingness to make good financial decisions in other ways. In addition, you learn to understand the factors that increase your property’s value, ensuring that you take care of it with an eye toward its long-term value.

Increased Focus on Future

In fact, homeownership can help create a future-focus that will benefit you and your family. Understanding long-term return on investment, homeowner’s insurance, maintenance, and value-added enhancements help you make other decisions with an eye on their long-term impact. Taking the long view is a winning strategy for a variety of investment and financial planning initiatives, and homeownership can help you flex that muscle.

Impact on Children’s Wealth

In addition, according to Fannie Mae, homeownership and its impact on personal wealth is a key factor in the educational attainment of the homeowner’s children. There is a strong correlation between the owner’s level of education and homeownership and between these factors and children’s educational outcomes. Thus, homeowners are setting their children up for academic success through the stability and security provided by the home itself. In addition to this, homeowners are encouraging habits that will likely result in their children becoming homeowners and experiencing similar increases in net worth. This, taken along with the impact of inherited wealth, is a strong determinant of future financial success.