Calculator in the shape of a home

Financial Benefits of Owning Your Own Home

When you purchase a home you are not just buying a home, you are making an investment. As with all investments you want to know if you will get good returns, or if you will lose money.

History shows that in the U.S. homes increase in value about five percent per year. Now obviously in some years, homes will increase more than 5 percent and some years will see homes decrease in value. Home price appreciation also varies from region to region and these is no guarantee that future performance will follow past performance.

Now 5 percent may not seem much, you could probably earn more by investing in the stock market. The difference is when you buy a home the chances are you will not be paying cash, most of the cost of the home will be covered by a mortgage. For example, typically you put 10% down and the remainder is paid via a mortgage. So given this information, if you purchased a $200,000 home, your cash investment would be $20,000. With an average appreciation of 5 percent, your first year's return would be $10,000, that's a return of 50% on your cash investment of $20,000.

Now obviously there are other costs to consider. There is the property tax, home insurance, utilities, maintenance and of course the mortgage payment. While these costs may seem to cancel out any gain in home value, there are certain criteria that can offset this cost.

For a start both property taxes and mortgage interest can be deducted from your taxable income. So for example, if you pay $10,000 in mortgage interest and property taxes in a year, you would get a $10,000 taxable income deduction. The other main cost which offsets your mortgage is the cost of rent you would be paying if you had not purchased a home. With rent you receive no benefit, any appreciation in the value of a home benefits the landlord, while you pay the landlords mortgage via your rent payment. In other words rent is dead money.

One of the other benefits of owning your own home, is that you have fixed monthly mortgage payments (assuming you have a fixed-rate mortgage and not a variable rate mortgage), which makes it easier to plan your finances. With a normal fixed-rate mortgage, your interest payment will always be the same, if the monthly payment is $1000, then in 10 years time the monthly payment will still be $1000. How much will your rent have gone up in those 10 years?

Depending upon the type of mortgage you choose, owning your own home may also help you save money. With a repayment mortgage each time you make a payment, some of the money goes towards the interest and some of the money is used to pay down the principal. This means you are reducing your loans balance, in effect increasing your savings (assuming the value of your home is not going down).