Why Home Ownership Makes Dollars and Sense

Why Home Ownership Makes Dollars and Sense

Hands holding a piggy bank and a house modelWhen you evaluate the financial factors, the numbers make an impeachable case for owning a home over the long-term rather than simply paying rent. If you take as an example buying a $250,000 home you will find these advantages include the following.

Example based on a $250,000 purchase price

  1. Tax Write Off
    Loan Amount                      $237,500
    Interest Per Year                $10,116
    Property Taxes                    $1,800Total Write Off                    $11,916Tax Rate                                25%
    Monthly Savings                 $248.25
  2. Forced Savings
    Amount of principle reduction each month = $327
  3. Appreciation
    4% is the national average for annual home appreciation
    4% on a $250,000 house is = $10,000 per year or $833 per month

 

Total Monthly Savings                            Tax Write Off                      $248.23
Forced Savings                   $327

 

  • Tax Savings. That favorable tax treatment translates into significant after-tax savings. In the case of our sample home, the savings are as much as $248 every month, using these assumptions:
    • Tax Write Off
      • Loan amount of $237,500
      • Average interest per year of $10,116
      • Deductions from property taxes of $1,800
      • Total deductions from home ownership of  $11,916
      • Tax rate of 25 percent
  • Forced Savings. In addition to this recapture of taxes, you will be reducing your principal balance by an average of $327 per month. That is essentially the same thing as putting that amount in the bank every time you write a mortgage check.
  • Appreciation in Market Value. Historically, homeowners have enjoyed an annual appreciation of the value of their properties of at least 4 percent. Our $250,000 home will appreciate by at least $10,000, or another $833 in accrued assets and personal wealth. Even more importantly, this increase is often compounded in many areas.

A simple process of addition shows that home ownership quickly turns your mortgage payment into a private wealth-building plan. The totals of $248 from tax savings, $327 in principal reduction, and $833 in appreciation come to a stunning $1,408. This form of financial alchemy helps explain why many Americans retiring today are able to enjoy a comfortable lifestyle. They pay off their homes during their working lives, use a lower tax bill to save even more, and then either sell their greatly appreciated homes or use a reverse mortgage to tap into their accumulated equity.

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