They say home is where your heart is, but did you know it’s also where your wealth is? According to the 2019 Survey of Consumer Finances, the median homeowner has 40 times the household wealth of a renter. With most of their wealth coming from housing, it was not only median-income earners, but homeowners are wealthier than renters across every income level. Despite volatile markets, homeownership remains an effective means of wealth-building, especially for lower-income households.
Homeownership serves as a forced savings method through home-value appreciation. Each month, when a mortgage payment is made on the principle of the loan the amount of equity amassed in the home grows. Depending on the market and what improvements you make on the property, a home’s value will usually increase with time, growing your equity further. With more equity, the proceeds you would gain from selling rise, as does the amount you can borrow against.
Hedge against inflation
According to research done by Harvard University’s Joint Center for Housing Studies in their paper, “Is Homeownership Still an Effective Means of Building Wealth for Low-income and Minority Households?”, a fixed-rate mortgage can provide a hedge against inflation. “Assuming a fixed-rate mortgage, inflation of 3 percent, 1 percent growth in both real house prices and the costs of property taxes, insurance and maintenance, real monthly housing costs would decline by about 10 percent after 5 years, 15 percent after 10 years, and 30 percent by the last year of the mortgage. Once the mortgage is paid off, the out-of-pocket costs of owning in real terms are less than half the payments made at the time of purchase. Housing costs for renters, in contrast, would be expected to keep pace with inflation in housing prices.”
Good for Credit
Although it means taking on debt, a mortgage is considered a “good debt” because it’s a tangible asset that has a high probability to gain value. A credit score is affected by payment history, credit mix, and length of credit history. Having a mortgage loan diversifies your debt, showing lenders you can handle different types of debt. That, coupled with the opportunity to make up to 30 years of on-time payments, has a highly positive effect on your credit score!
Even if you don’t view yourself as in a position to buy a house, it’s a good idea to speak to a mortgage lender and learn your options. While 20% down is typical for purchasing a home, there are many lending options available that don’t require a large downpayment, including First Time Homeowner, VA, and FHA. In many cases, a mortgage payment costs as much or less than monthly rent, except instead of paying a landlord you are increasing your equity and investing in your future.
Owning a home isn’t just part of the American dream, it’s a gateway to success and financial stability. If you would like to know more about the path to homeownership, give us a call at 307-635-0303.