To be perfectly clear from the start, I’m a big advocate of homeownership. I own my own home, and I’ve written before about all of the reasons to buy a home. I believe for many people, owning a home is a smart financial decision — and here’s why.
To illustrate the potential long-term financial benefits of homeownership, let’s consider an example. We’ll say you’re 30 years old and are debating buying or renting, and that you have a $1,500 monthly budget for housing and enough cash in the bank for a 20% down payment. (Note: I’m aware that assuming you have enough cash to put 20% down is a assumption.)
Based on a 30-year mortgage interest rate of 4% and the national average rates for property taxes and homeowner’s insurance, this means you could afford a $314,000 house.
Consider the following statistics and what they mean in this situation:
Perhaps the best argument to be made for buying a home and living in it for decades is this chart of home value versus mortgage debt over a 40-year period:
As we said, after 30 years, your home could be worth $762,000 and you’ll owe no money. You would have paid $432,000 in principal and interest mortgage payments over the years. Even if we assume that your taxes and insurance costs will grow at a high rate of 5% per year, this still only translates to total housing costs of $671,000 over three decades — less than the end value of the home. You could then sell it and put this cash in your pocket, minus any real estate commissions.
Meanwhile, if you had rented, you would have paid $856,357 in rent over 30 years, and would have no equity to show for it. This is a big reason why the Federal Reserve’s Survey of Consumer Finances found a big gap between the net worth of homeowners and renters of all income levels.
In addition to the long-term financial reasons I already discussed, there are several other compelling reasons to buy a home, including:
However, I realize that owning a home isn’t the best move for everyone. There are some good reasons you might be better off renting, such as:
As I mentioned, homeownership is not for everyone, and there are some compelling reasons in favor of owning renting. However, from a purely financial standpoint, it’s tough to argue with the long-term benefits of buying a home.