Nearly a quarter century ago, back when I was a newish homeowner, and my mortgage payment seemed daunting to me, an older coworker, Mike, relayed a story that has stuck with me for life. He talked about when he first came back from Vietnam in 1973, and married his high school sweetheart. The first thing they did was buy a house with his VA loan in the San Fernando Valley. His mortgage payment was $171 a month, back then that was a significant sum. The first year, Mike struggled adjusting to that bill, but over time it got easier. “I laugh when I write that check now,” he told me. Despite the fact that he had a 30 year mortgage, had never refinanced, and was still making a payment, his living expense was a humorously small fraction of his income a few years later. Mike now had more disposable income on hand to use as he pleased, to invest, travel, and spoil his kids.
One of the greatest benefits of homeownership is derived from fixing your monthly housing costs. A fixed mortgage payment never changes for the life of the loan, and once paid off, you own it. Your costs on the property are maintenance and taxes. Even better, this advantage can be passed down to heirs. This is in stark contrast to renting, where market demand and inflation are constantly pushing an increase in rents, and in the process renters often find themselves paying market value in perpetuity.
Homeowners like Mike don’t necessarily start out in a different position from renters. I purchased my first property with the assistance of an FHA loan and paid 5% down. These loans were created for buyers who may not necessarily have a large down payment, but are capable of handling a monthly mortgage payment as well as mortgage insurance in the event of a default. These loans can be done with as little as 3.5% down. This can be a huge help for younger buyers or people who don’t have a windfall or generational wealth to rely on for a traditional down payment.
Becoming a homeowner confers a number of additional advantages. There are tax deductions for mortgage interest and property taxes. These perks are built into our tax code as a way of encouraging home ownership. Being able to profit from them while covering a critical need, shelter, is a massive boon. There is also the forced savings aspect of the mortgage itself, where each payment confers a portion of the value, or equity, of the property to the owner. There is also the potential for the appreciation of value on the property over time, all of which goes to the homeowner, if the property increases in value over time, as my first place did, from $184,000 to $290,000 in five years, the owner realizes that entire value despite the small initial down payment, and the existing remaining mortgage. This leveraged gain can be massive over long periods of time, and is one that a renter does not get (however their landlord does).
Debates about the value of homeownership as a wealth building tool often spring up from time to time, so here is something important to consider: in 2015, the US Census Bureau discovered that the two largest determinants of household wealth are homeownership and retirement accounts. This fact is not particularly surprising, owning things is an indicator of wealth. What may surprise some is how stark the wealth divide is. Homeowners have a median net worth of 80 times that of the median renter, even after removing the top one percent of net worth households from the study. That gap is massive, and so it is critical not to be stuck on the wrong side of it. But it’s important to understand why it is true.
Helping you to plan for the future, and understanding how owning your home is a critical element for future financial success, is one of the most enjoyable aspects of my work. If you have questions about how to make homeownership work for you, contact me today.