Advantages of Buying
1. Building Equity Over Time
Unlike renters, homeowners build equity over time. On most mortgages, a portion of each monthly payment goes toward the loan’s interest. The remainder pays down its principal. (Your lender’s amortization schedule shows the exact proportions, which change over time, for each month’s payment.) Every dollar you put toward your loan’s principal represents a dollar of equity – actual ownership of the property. Once you reach 20% equity, or 80% LTV, you can tap that equity through a home equity loan or refinance your mortgage to secure a lower interest rate or longer repayment window.
You can also boost your home’s value, and thus lower your LTV, through judicious investments in home improvement. For instance, the home my wife and I recently purchased has only a rutted dirt driveway with a small shed at the end. Paving the driveway and building a proper detached garage in place of the shed would substantially increase the property’s functionality and curb appeal, potentially boosting its value by an amount greater than the project’s total cost.
2. Tax Benefits
Several tax benefits cater exclusively to homeowners, though not all homeowners qualify for all benefits. These are the most notable:
Homestead Exemption. Many states exempt owner-occupied homes (homesteads) from a portion of the property tax burden that would normally accrue. For instance, Louisiana exempts the first $75,000 of a home’s value from property tax assessments, so a $200,000 home in New Orleans is taxed as if it were worth $125,000.
Federal Tax Deductions. If you itemize your federal income taxes, you can deduct your property taxes and the interest paid on your mortgage, reducing your overall income tax burden (often substantially). This particularly benefits those in higher tax brackets.
These benefits aren’t available to renters.
3. Potential for Rental Income
Even if you don’t initially think of your home as an investment property, you can turn it into a source of income. This can partially or totally offset your mortgage, tax, and insurance payments on it.
The easiest way to do this is by renting out part or all of the property, provided you follow all local rental property laws. You might rent out a basement bedroom to a friend, live in one unit of a duplex and rent out the other to strangers, or purchase and move into a second home, leaving your entire property free to rent. You can also plunge into the sharing economy and take in short-term renters via Airbnb, Vrbo, or another house-sharing platform.
4. More Creative Freedom
As a homeowner, your decorating, DIY project, and home improvement choices answer to no one, provided they don’t break local building codes or violate homeowners’ association rules. You can paint walls, add new bathroom fixtures, update your kitchen, finish your basement, or build a patio or deck to your heart’s content.
Radically changing your living environment to suit your whims is a fun, and even cathartic aspect of homeownership – and generally, it’s not available to renters.
5. Sense of Belonging and Community
Since homeowners tend to stay in their homes for longer than renters, they’re more likely to put down roots in their communities. This manifests in many ways. You might join a local neighborhood association, sponsor block parties or National Nights Out, volunteer at a nearby community center, join a school group, or align with a business improvement district. As a renter, you might not do any of those things, particularly if you know you may be moving in a year or two.
Is owning a home right for you?
Becoming a homeowner comes with a lot of responsibility, but also a lot of rewards. To help you decide if owning a home makes the most sense for you, here are some of the main reasons people choose homeownership over renting.
It’s a Good Investment
While home prices move in cycles over the short-term, if you stay in your home for a long time, it could increase in value and give you a substantial return on your investment.
If you are currently renting a home or apartment, use our Rent vs Buy Calculator to help determine which option provides the most economic benefits for you over the time you plan to be in your residence. When using the calculator, be sure to include some assumption about future increases in your rent, as most landlords periodically raise rents.
You Build Equity
When you subtract the amount you owe on your home loan from the total value of your house, the amount left over is your home equity-the “dollar” value of your home that actually belongs to you. There are two ways to build equity:
With each monthly mortgage payment you make, a portion goes toward reducing the amount you owe on your loan, which increases your equity. In a sense, paying your mortgage is a form of savings, as it increases the equity in your home.
As your home increases in the value, it creates more equity for you
In a sense, paying your mortgage is a form of savings, since it increases your home equity which you can tap into if you need money in the future.
When necessary, you can borrow against your home equity to meet a variety of financial needs, including home improvements, education or medical expenses. A home equity loan or line of credit can also be used to pay off high interest credit card debt, since the interest rate is generally lower and the interest payments are tax deductible. Read our Cash Out Refinance article for more information on how you can one day access the equity that you build in your home.
You Enjoy Significant Tax Deductions
Owning a home can reduce the amount you pay in income taxes each year. Your mortgage interest and property tax payments may be deductible from your federal taxes, as well as many state taxes. Certain closing costs and loan discount points also may be tax deductible1. In the early years of your mortgage, when interest represents the bulk of your monthly mortgage payment, these tax deductions can put a significant amount of money back in your pocket.
You Build a Strong Credit History
When you buy a home and consistently make your monthly loan payments on time, it demonstrates to other lenders that you are a good borrower and the risk of you defaulting on a loan is low. This strong credit history will be helpful in the future when you need other loans for buying a car, making improvements to your home, or paying other major expenses.
You’re Free to Create the Home You Want
Homeownership offers tremendous freedom to create the living environment that you have always wanted. You can own pets, paint rooms whatever color you like, make changes to floors and carpeting and do all the things that make a house your home – all without having to get approval from a landlord.