Here’s why you may want to stop writing a monthly rent check and start building equity in a home.
Taking the leap into homeownership — whether you’re considering a home for sale in San Diego, or Tampa, FL — can be daunting when you’re used to renting. From house hunting to making an offer to gathering pertinent paperwork, it’s a much more complex process than signing a lease agreement.
But while easier financial approval and less responsibility make renting attractive, the numbers suggest becoming a homeowner could be better for your overall financial picture. According to the latest Trulia Rent vs. Buy report, with historically lower interest rates combating rising home prices, buying is cheaper than renting in 100 of the largest metro areas by an average of 37.7%.
“Owning a home is one of the most common ways households build long-term wealth, as it acts like a forced savings account,” says Ralph McLaughlin, Trulia’s Chief Economist. “Instead of paying your landlord, you can pay yourself in the long run through paying down a mortgage on house. That said, potential homeowners should go into homeownership with the expectation that wealth generation will be more akin to a marathon than a sprint.”
So although renting may be easier on your wallet right now, over time, it can’t stack up to the long-term financial benefits of buying a home. Here are just a few reasons homeownership — and the financial security it offers — may be right for you.
1. You can build wealth without paying capital gains
Depending on the housing market and where you buy, there’s always a chance your home won’t appreciate in value. However, it’s certainly not uncommon to sell a home for more than you paid for it. If you earned that same profit selling off stocks, you could be required to pay 15% of the total earned in capital gains tax. But if you made the profit selling a primary residence you lived in for at least two years, you are exempt from paying capital gains. By preserving more of what you earn, you can build wealth faster.
2. A mortgage can act as a forced savings account
For those who haven’t made a habit of putting money away, paying a mortgage can create a savings cushion that renting cannot. “For people who do not trust that they can save money in a bank or investment account, this forced savings can benefit them down the road and actually help them grow their wealth,” explains Roberge. “Owning a home does not guarantee a higher net worth, nor does it remove the need to be financially responsible, but it does provide a structure within which one can build wealth.”
3. Overall, homeowners can enjoy greater wealth growth than renters
Research conducted by the Joint Center for Housing Studies at Harvard University concluded that homeowners experience a larger growth in wealth than renters, regardless of socioeconomic class. There are risks, the study acknowledges, but the financial benefits are undeniable. “Homeownership is a sound investment if a household can meet two basic requirements,” says McLaughlin. “One, that they’ll stay put in the home for at least 5 years, and two, that they’re not paying an unreasonable amount of their income towards their housing payment.”
Maybe you plan on relocating in a few short years, or maybe your financial situation is rocky and your credit has seen better days. Personal circumstances don’t always warrant buying a home right now. But in the long game of establishing a solid financial foundation, buying a home can be an important piece of the puzzle.