Do you wonder about the TAX INCENTIVES?
Are you worried about whether homebuying is a good INVESTMENT?

You purchase a home that costs $200,000. You elect to put down $10,000 as a downpayment (plus closing costs – expenses incurred to actually process the transaction). You finance the balance with a 30-year fixed rate mortgage at 5.5 percent interest. Your monthly payments (not including utilities, maintenance, insurance, etc.) are:

Owning Can Lead to Tax Savings
None of the money you pay in rent is returned to you, either through savings or as an investment. Homeownership, on the other hand, often has tax advantages over renting a home, and those advantages can help you save money. For many homeowners, part of the monthly mortgage payment “comes back to you” in tax savings.
Owning your home reduces your federal income tax bill by $268 a month. In addition, as you pay down your mortgage loan, your equity – the wealth you have in your home – increases. If home prices rise, the equity you have in your home increases, too.

Buyers Usually Come Out Ahead
Given that price growth has recently deviated from its usual pattern of increase, the table on the right considers four different price growth scenarios, including a loss. The first line under appreciation shows no increase, the second shows a loss, the third shows growth below the national average and the fourth shows growth at the national average. You may be surprised to see that the homeowner still comes out ahead of the renter even if there is a small decline in the home’s value over the next year. Favorable interest rates and lower prices have ushered in some of the best affordability conditions in a generation.

Homeownership is a Good Investment, But No Investment is Guaranteed
For the majority of Americans, a home is their largest financial asset and a major component of their investment portfolio. The NATIONAL ASSOCIATION OF REALTORS® estimates that home value rises, on average, by 4.5 percent a year. That’s a steady return on investment. Still, no investment is guaranteed. Many Americans lost value in both their homes and investment accounts in the last couple of years, and it will take some time to recover. Even when the recent downturn is considered, one’s own home is a much less volatile asset than stocks, bonds, or mutual funds. And most importantly, it is a place to call home while you own it.

Home As An Investment
As an example, let’s look again at that $200,000 home. Unlike a rental unit, your home usually appreciates over time. Average price appreciation from 1970 to 2008 was 6.0%. Many national appreciation figures come in at 4.5%; however, in Indiana, homes tend to appreciate at a steady but lower rate. We are not plagued by the market bubbles, nor prices climbing to unsustainable prices beyond the reach of many. Some years we have flat appreciation with near 0% increases while other years are closer to 2 or 3% growth.

Let’s assume average growth at 1.5% for this scenario, after ten years your $200,000 home will be worth $232,108. Not only do you earn a rate of return on your original purchase price, you also get a return on any subsequent appreciation.

Homeownership Builds Wealth for Households
The Federal Reserve Board estimates that homeowners’ net worth has ranged between 31 and 46 times more than that of renters in the years 1998 to 2007. In 2007, the median net worth for homeowners was $234,200 compared to $5,100 for renters. Even though that difference will surely narrow as a result of house price declines since 2007, homeowners will likely still have substantially greater net worth than renters. How do you build up your net worth? As a homeowner, you build wealth in two ways: through paying down the principle on your mortgage and through those “appreciating returns” on your home. We’ve already seen how your $200,000 home could be worth $232,108 in ten years. In addition, you are paying down the principal on your mortgage. Remember that $200,000 you borrowed at 5.5 percent over 30 years – that debt amount is decreasing every month and every year as you make payments.

After the first year, you now only owe $187,441 on a home that is worth more than $200,000. As home price growth returns to a normal level the amount of wealth that you net from appreciation will increase. At the same time, mortgage payments reduce your outstanding debt. As your debt decreases and the home value increases, you accumulate wealth from the value of your home. In addition, over this ten-year period, you will have a significantly lower after-tax payment for housing. Each year as your home appreciates and you continue to pay down your mortgage debt, you increase your own net worth.

Why Buy Now?
You may wonder whether it is worthwhile to wait to purchase your home until prices are at their lowest. Prices are not the only factor that should drive your decision. Currently, interest rates are near generational lows that greatly improve the affordability of homes. Further on the annual cost table, you can see that even if home prices decline, the possible tax savings of owning a home can lead to a lower cost for the buyer, not the renter. Finally, and most importantly, when you have made the decision to commit to homeownership because you are ready, market conditions are a secondary concern. In fact, the NATIONAL ASSOCIATION OF REALTORS® 2009 Profile of Home Buyers and Sellers found that four in ten first-time buyers purchased a home because the buyer was ready to make the commitment to homeownership.

Source: National Association of Realtors