Buying a home, much like selling a house, is exciting and scary, and no matter whether or not you plan to do it yourself one day, there are lots of things that most people don’t understand about the process of buying or selling your home. While there are numerous details which we could discuss, we’ll limit ourselves to the financial incentives which are built into home ownership.
Properly understood, these financial benefits are a strong incentive to purchase a house, and could form the foundation of significant wealth building for a new generation of Americans. Here are three important factors in this process.
This is, perhaps, the most important concept in the buying of a house. But it’s something that many people just don’t completely understand. Think about it like this: when you buy a house, you don’t actually own it. Not really. A bank, or other lending institution, actually owns it.
They let you live there, but only as long as you pay for it little by little, according to the terms of the mortgage agreement you signed. As you pay them back (plus interest: the cost of using other people’s money to buy a house), your payments fill in the “hole” of your loan debt. If you have paid $30,000 over a couple of years, that’s $30,000 out of the total value of your house which you own.
But this isn’t a liquid asset like cash, which you can turn around and spend. It’s wealth tied up in property, but it still counts toward your net worth and will have big ramifications for your credit, borrowing, and further wealth building opportunities.
When you sell your house, then and only then will you get access to this built up equity.
Most homes appreciate in value, though not all. Those that do tend to do so at a rate of 2-4% per year. Interesting fact to note: if you are paying an average fixed interest rate of 3.75% (or so), a 4% appreciation will negate the cost of that interest. Basically, you will be gaining wealth equity at a faster rate than you are spending wealth in interest, meaning that for people with 4% appreciation or greater, they have been able to borrow money from a bank for free! This is an amazing opportunity and one which makes home buying make so much more financial sense.
Then, when you decide to sell your house, you’ll reap the benefits of that appreciation.
Tax Write Offs
The government wants you to buy a house. This makes you more likely to be a stable citizen and strong part of a tax base. It also makes you more likely to feed into a healthy economy, which is buoyed when more people own homes. As such, the government gives tax breaks to home buyers, allowing them to write off the interest of their mortgage loans. That is another way to get “free interest” on a mortgage loan. Combined with #2 above, you could be making money on your interest, when all of the numbers are run!
Home buying may sound hard and scary, but when you sell your property, you will see it was a great way to build wealth and increase your net worth.