If you never intend to sell it for profit, then your home cannot be an investment in the truest sense of the word. But this does not mean that homeownership isn’t an excellent way to build wealth! Since you must spend money on your living arrangements, doing so in a fashion that retains at least part of that wealth under your name is an excellent way to increase your net worth.
How exactly does homeownership build wealth? Although the particular features of the current housing market and the economy at large have profound impacts on homeownership as an investment, the same general rules apply regardless of all the crazy things going on in the world at any given time.
Homeownership Builds Equity
This one is simple to understand. When you pay rent to a property manager, 100% of that payment becomes your property manager’s in perpetuity. But when you make a payment to a mortgage lender, you will necessarily retain part of that payment as equity. In essence, if you pay rent for five years, you will have paid for nothing more than a roof over your head. But if you pay off a mortgage over the same period of time, you can own at least one-sixth of a house.
Mortgage Payments Are Fixed
Unless they live in a rent-controlled area, a renter is ultimately at their property manager’s mercy when it comes to how much they will have to pay to them monthly. Conversely, a fixed-rate mortgage carries a constant interest rate from its onset until its completion. This has the effect of keeping your monthly expenses lower, not to mention providing the peace of mind that can only come from knowing how much you’ll be on the hook for every month.
Homeownership Brings Tax Savings
We know you love giving the government as much of your money as you’re able, but you will still probably want to deduct the mortgage interest of your mortgage loan from your taxes. Under the Tax Cuts and Jobs Act, homeowners can now deduct the interest on mortgage loans up to $750,000. They may also deduct up to $10,000 in property taxes annually!
Homeownership Hedges Against Inflation
The record inflation of 2021-2022 aside, home prices have kept at pace with inflation over the past six decades. That means if you purchased a home in 1980 and sell it today, you would have essentially the same buying power as you had in 1980. But this overlooks a crucial point. Suppose you took the $50,000 you could have spent on a home in 1980 and kept it in your sock drawer for 42 years instead. You would have $50,000 in today’s money – as opposed to a house worth approximately $172,000!
Homeownership May Yield Long-Term Appreciation
Even if you never intend to sell your home, knowing that it is steadily appreciating in value is immensely gratifying. Minnesotan real estate has appreciated in value by nearly 120% since the year 2000. In other words, if you celebrated the passing of Y2K by purchasing a $100,000 home, that same piece of real estate would be worth approximately $220,000 today. Many other types of investments would have surpassed this rate of appreciation, but you can’t very well live inside a stock portfolio.
Of course, treating homeownership solely as a means of building wealth overlooks its greatest benefit. There is no feeling quite so satisfying as knowing that the four walls and the roof surrounding you belong to no one other than yourself. It is also heartening to know that you will pass down so valuable an asset to your children or grandchildren – especially as homeownership becomes increasingly difficult for younger generations.
If you live in or are moving to Central Minnesota, then the Sherburne State Bank team would like to help you build wealth through homeownership. We offer home equity lines of credit and home equity loans, a variety of mortgages, and both construction and land loans. We welcome you to visit one of our locations in Becker, Monticello, or Princeton in person, or contact us today!