The new tax law doubles the standard deduction and it is estimated that over 90% of taxpayers will elect to use it. However, even without considering tax benefits, homeownership has convincing advantages.
Besides the personal and social reasons for owning a home, one of the most compelling is that it is cheaper. Principal reduction and appreciation are powerful dynamics that reduce the effective cost of housing.
Amortized loans apply a specific amount of each payment to the principal amount owed to retire the loan over the term. Some people consider it a forced savings account; when the payment is made, the unpaid balance is reduced.
The price of homes going up over time is appreciation. While there are lots of variables and it is not guaranteed, researching the history of an area and its current supply and demand provides an educated basis for projections.
Interest rates are still low (though recently rising) and can be locked-in for 30 years. Without considering the tax benefits at all, the appreciation and the amortization dramatically affect the “real” cost of owning a home.
Consider a $250,000 home that appreciates at 2% a year for the next seven years instead of paying $2,000 a month in rent. In the example, the payment is less than the rent being paid, even including the property tax and insurance.
When you factor in the monthly principal reduction and appreciation and consider additional owner expenses like maintenance and possible homeowners association dues, the net cost of housing is considerably lower than the rent. In this example, reduced cost in the first year alone is more than the down payment required on a FHA loan.
Based on the assumptions stated, the down payment of $8,750 could grow to $73,546 in equity in seven years. Can you name another investment with this kind of potential that also provides you a place to live, enjoy, raise your family and share with your friends?
Use this Rent vs. Own to make projections using your own numbers and price range. I’m available to try to answer any questions you might have and to help you find out what it will take to own your own home.