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Owning a Home Builds Long-Term Wealth

January 10, 2020

While renting may seem to be your best bet, for now, nothing helps to build wealth over time than owning a home.

It’s been almost three years since the New York Times reported the findings from a 2013 Harvard study on this very topic. And the results of that study are just as true today as they were then: the net worth of homeowners increases, while renters are more likely to accumulate very little at all.

Still not convinced? Check out the following reasons to learn how owning a home helps build wealth.

Home Values Increase Over Time

No matter how much rent you pay, you’ll never gain any equity in your property. You can’t borrow against a rented house. But as a homeowner, the longer you stay in your home, the more equity you’re likely to gain.

The Harvard study showed that at the end of a 30-year mortgage, homes were worth approximately 26% more after adjusting for inflation.

Protection From Rental Increases

Unlike rents, which go up every year, mortgage payments are fixed. Increases sometimes occur due to changes in taxes and insurance, but not as much as is possible from a rent increase. No matter how long you pay rent, you’ll always be giving your entire payment away.

After the first five years of paying your mortgage, the amount of interest you pay gets substantially smaller. That’s why it makes more sense to find a home that you plan on living in for at least a decade or more.

Tax Benefits for Homeowners

Homeowners get to deduct their mortgage interest and property tax payments from their taxes. In addition, the new capital gains guidelines allow the first $500,000 made on a home sale to be exempt from additional taxes.

A Built-In Savings Plan

As explained before, after five years of paying on your mortgage, your interest dramatically decreases. After year five, your principal amount drops much faster. This is like putting money into a savings account. Once your interest lowers, you are saving more money without spending more. These “deposits” mean that you’re building more wealth without changing your habits.

While the DC area’s high home prices may seem intimidating, the best path to wealth-building lies in purchasing a home and remaining in it long-term. You’ll earn equity as your home appreciates and have a valuable investment that will be worth more tomorrow than you paid today.

 

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