Are you unsure about becoming a HOMEOWNER?
Do you wonder about the TAX INCENTIVES?
Are you worried about whether homebuying is a good INVESTMENT?
Buying a first home can be an intimidating process. But the first step is deciding if: I want to own a home; I can afford to own a home; owning a home makes sense for me financially and emotionally. If you are still struggling with those decisions, here are some facts that might help you take that first step towards becoming a homeowner.
Rents Increase Over Time
Over the past ten years, the cost of rental housing in the U.S. has increased an average of 3% per year. If that trend continues, that means that an apartment or home renting for $1,000 per month will cost more than $1,300 a month in ten years. If you rent the same home for ten years, the total amount you would pay for rent will equal $137,567!
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| Year | Monthy Rent (avg. increase 3% per year) |
Total Annual Rent |
|---|---|---|
| 1 | $1,000 | $12,000 |
| 2 | $1,030 | $12,360 |
| 3 | $1,061 | $12,731 |
| 4 | $1,093 | $13,113 |
| 5 | $1,126 | $13,506 |
| 6 | $1,159 | $13,911 |
| 7 | $1,194 | $14,329 |
| 8 | $1,230 | $14,758 |
| 9 | $1,267 | $14,758 |
| 10 | $1,305 | $15,657 |
| Total Rent Paid Over Ten Years | $137,567 | |
Owning Can Lead to Tax Savings
None of that $137,567 is returned to you, either through savings or as an investment. Homeownership, on the other hand, often has tax advantages over renting a home, and those advantages can help you save money. For many homeowners, part of the monthly mortgage payment “comes back to you” in tax savings.
An Example of Ownership
You purchase a home that costs $200,000. Your downpayment is $10,000 (plus closing costs – expenses incurred to actually process the transaction). You finance the balance with a 30-year fixed rate mortgage at 5.5 percent interest.
Monthly Mortgage & Tax Payments
| Mortgage | $1,079 |
| Property Tax (@1.25% tax rate*) | 208 |
| Total Monthly Payment | $1,287 |
|---|
tax savings per month (assuming a 25% income tax bracket)
| Mortgage Interest Tax Deduction | $216 |
| Tax Deduction for Property Tax | 52 |
| Total Monthly Tax Savings | $268 |
|---|---|
| Total Monthly Cost After Tax Savings | $1,019 |
*property tax rates vary by city and county
Buyers Usually Come Out Ahead
Given that price growth has recently deviated from its usual pattern of increase, the table considers different scenarios.
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| Total Annual Costs | Homeowner | Renter |
|---|---|---|
| Annual Mortgage / Rental Payment | $12,948 | $12,000 |
| Real Estate Taxes | $2,500 | $0 |
| Mortgage Interest Deduction | $2,592 | $0 |
| Tax Deduction for Property Tax | $624 | $0 |
| Mortgage Principal Accumulation Appreciation | $2,559 | $0 |
| No Growth | $0 | $0 |
| Loss* | $-2,000 | $0 |
| Below Trend Growth** | $1,200 | $0 |
| Average Growth*** | $9,000 | $0 |
Annual Costs Less Equity Gains
| Scenario | Amount |
|---|---|
| No Growth | $9,673 |
| Loss* | $11,673 |
| Below Trend Growth** | $8,473 |
| Average Growth*** | $673 |
* assumes a 1% annual depreciation
** assumes a 0.6% annual appreciation
*** assumes 4.5% annual appreciation
Homeownership is a Good Investment for Qualified Buyers, But No Investment is Guaranteed
For the majority of Americans, a home is their largest financial asset and a major component of their investment portfolio. Home values rise on average over time, but no investment is guaranteed.
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| Year | Home Price | Mortgage Debt | Net Worth |
|---|---|---|---|
| 1 | $200,000 | $187,441 | $12,559 |
| 2 | $201,200 | $184,737 | $16,463 |
| 3 | $210,858 | $181,880 | $28,977 |
| 4 | $220,346 | $178,863 | $41,483 |
| 5 | $230,262 | $175,675 | $54,587 |
| 6 | $240,624 | $172,308 | $68,316 |
| 7 | $251,452 | $168,750 | $82,701 |
| 8 | $262,767 | $164,992 | $97,775 |
| 9 | $274,591 | $161,022 | $113,570 |
| 10 | $286,948 | $156,828 | $130,120 |
Why Buy Now?
Timing the market is less important than readiness. Interest rates and personal readiness often matter more than price timing.
Homeownership – It’s NOT Just About Money
There are also non-financial benefits such as community stability, pride of ownership, and long-term security.
Homeownership: The American Dream
More than two thirds of American households own their home. REALTORS® help guide buyers through the process and first-time homeownership decisions.