Buying a home is often seen as a rite of passage for young adults, but many overlook the fact that it can also be a great way to build long-term wealth. As you pay off your mortgage and build equity in the home, you gradually gain financial independence. Even though it may seem daunting to borrow hundreds of thousands of dollars, the return on investment from owning a home is typically much higher than any other investment you will make in your lifetime. In other words, buying a home is one of the smartest financial decisions you can make.
Keep reading to see just how your wealth builds when you buy a home.
Each Mortgage Payment Stacks Up
Even though it seems like a steep hill to climb, every mortgage payment you make knocks some of the principal down off your loan. Every time you knock even a dollar off the principal, you gain a little bit of equity in the home. Month after month, that equity grows, giving you a larger net worth. It’s like an automatic savings account – you have to make your payments in order to keep your house, yet you see a return on your investment with every payment.
A Paid-Off Home Means More Income
Once you get through those pesky mortgage payments, you’ll have even more money to invest. Not only will you have the principal in the house that you now own, but you can invest the money you paid to your mortgage each month somewhere else. This helps to even further your net worth in the long run. Of course, this requires you to stay consistent with your investments rather than spending the money you no longer owe on your mortgage.
Real Estate Usually Appreciates
The housing crisis might have you thinking otherwise, but generally, real estate appreciates. This helps you build your net worth without you doing a thing. As long as you make your mortgage payments on time, you continue to build your portfolio just by owning a home. The good news is that your mortgage payment will remain stable, but your investment will appreciate.
Tax Deductions Help Your Net Worth
As a homeowner, you’ll be privy to several tax deductions including the mortgage interest deduction and real estate tax deduction. These deductions lower your tax liability, putting more money in your pocket. Without these deductions, your adjusted gross income would be higher, which would mean paying more in taxes. You can even save on capital gains on your home. Right now, singles can make up to $250,000 in capital gains and keep them tax-free and couples gain make as much as $500,000 tax-free.
Buying a Home Protects You From Inflation
As home prices increase, your mortgage remains the same. You don’t pay more for housing, even though prices go up. This helps your dollar go even further, helping you to stretch out that net worth. On the other hand, if you rented a home, you would be subjected to the higher rent prices due to inflation, which would cause you to pay more and lose money that you could be investing.
Buying a home might not be for everyone, but it has historically been a great way to build wealth. If you are unsure if now is the time for you to buy a home, talk to a lender. Discuss your options to see what type of mortgage you qualify to receive and how it sits with your budget. If you can afford it, the earlier you invest in a home, the more you’ll make in the end.
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