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Buying A Home Financial Gain
Buying A Home Financial Gain
| Why is it a good idea to buy a home? |
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Historically, the median price of a single family home has appreciated at about 6% per year. Homes will appreciate more in some years than others while values can also go down during recessionary periods. But over the long run, such as in the last 25 to 50 years, houses have gone up an average of 6% per year. Six percent may not seem like a great return, since some stocks will appreciate more than that, but let’s look at all of the benefits of home ownership. Firstly, most people who buy a house take out a loan and put a small percentage of the purchase price down in cash. Consider a $200,000 home where the buyer puts $20,000 cash down and finances the balance of $180,000. At 6% appreciation the house will increase $12,000 in value during the first year. Remember the cash investment was only $20,000 because of the loan. This is a 60% return on investment! Now I can hear you saying “but now I have to pay off this $180,000 loan too!” So, let’s look at how this loan payment stacks up against the alternative… rent. If we assume you can get a 5% interest rate on a 30 year fixed rate mortgage, your principal and interest payment will be $966.27/month. Say your taxes and insurance are $2,000 per year, then the monthly rate will be $166.67 or a total house payment of $1,132.94. To rent a similar home, we can expect the rent will be really close to the same monthly rate, especially when you factor in the interest deduction that you can take as a home owner. To recap, as illustrated in this example, the return on investment assuming 6% appreciation is 60% and the monthly payments are about the same as the cost of rent! And, this is assuming a very conventional purchase scenario. Furthermore, there are many different creative ways to buy a home that can increase your return. |
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