There are many reasons why people choose to buy a home, some of which are very personal to the individual.
Four of the most common reasons include:
- To own an asset and build equity
- To invest money in something that can appreciate in value
- To payoff the mortgage and avoid having a monthly payment in retirement
- To have control over one’s living space or live in a new home
Benefits of owning vs. renting
If you are not as inclined to think long term, you can simply compare the benefits of owning versus renting on a monthly basis to see the advantages of homeownership.
Let’s say that you currently pay $750 in rent each month. What do you get for that $750? A roof over your head for a month, nothing more. But if you paid a $750 mortgage payment each month, you would still have a roof over your head and a portion of that $750 payment would go towards increasing your equity in the home and reducing the amount of interest paid next month.
There are tax benefits as well with homeownership. For instance, the tax-free treatment of any of the money made over time in the home as its value increases. If the home is sold and profit is taken out, there is no tax to pay on this money.
There is no guaranteed investment that pays a higher return than the interest cost on a mortgage.
This means it is better to own a home and pay off the mortgage in preparation for retirement than it is to pay rent and save up an investment portfolio because there are no guaranteed investments that will more than cover the guaranteed monthly cost of having to make a mortgage payment or a rent payment.
The simple fact is that a family’s net worth is statistically correlated with owning a home. The below chart on the right illustrates the dramatic impact of homeownership on a median family’s net worth. It compares two families, both with a net worth of $10,000. One family rents while the other family owns but carries a mortgage of $240,000. When the homeowning family owns pays-off their mortgage, their median net worth becomes $560,000.