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, it is easy to research the history of an area and make predictions based on supply and demand.
In our local market prices have been going up 2-3 annually for many years and we have seen some stellar growth the last couple of years of up to 15%. You can always check out our Monthly Market Reports on any of our major Communities. Coeur d’ Alene, Post Falls or go to our Home page and select a smaller community from there.
Interest rates are maybe not the best right now but they will fluctuate over time and you can always refinance when they get to the appropriate rate for you. The best part is that the can be locked-in for 30 years so your payment will stay the same.
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 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, 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 an 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?
Some Additional Reading!
How to buy a Home