How Homeownership Builds Wealth and Security

Homeownership is about a lot more than putting a roof over your head. Homeownership is also the key to building wealth. In fact, according to one survey by the Federal Reserve, U.S. homeowners have a median net worth that is 40 times higher than renters. Yet given that the path to homeownership can be highly expensive, especially in the New York City market, it’s understandable if the whole process can seem incredibly daunting.

Nevertheless, understanding the benefits of homeownership from a wealth and security standpoint can help individuals see the value of owning rather than renting. By containing to remain a renter, you will miss out on a lot of advantages such as equity, tax benefits, and more. To better understand why, let’s take a look at how homeownership can allow you to build wealth and security.

What is Wealth?

Wealth is not simply a measure of how much money you have in the bank. Rather, wealth is a value measure of all the physical and financial assets you own, such as homes, cars, retirement accounts, and bank accounts. To determine your own wealth, simply add up the market value of all your assets and then subtract any debts you owe. This is your net worth and for most people, building it up is their primary financial goal.

What is Security?

While everyone has their own definition of what it means to be wealthy, there is a common thread. Wealth equals security, the security to live comfortably while enjoying the freedom to make any financial decisions you wish. With enough wealth, you can have enough security to lay the foundation of inter-generational wealth, ensuring that both your kids and grandkids will start their lives on a secure footing. Ultimately, security is the end goal for all wealth-building endeavors because, without security, money is just numbers on a screen.

5 Ways to Build Wealth and Security through Homeownership

Although there are many paths to achieving wealth and security, one of the oldest still remains the best – homeownership. While it’s impossible to predict exactly how much wealth a particular home purchase will bring for you, there are some consistent indicators that show how a home can generate wealth.

1. Stable housing payments

The toughest thing about being a renter is that you have little control over rent increases. While NYC rental law does require landlords to provide advanced written notice before they can raise a tenant’s rent by 5 percent or more, there is no limit on how much a landlord can increase your rent. Such unpredictability can make it very difficult to plan for the future.

By contrast, a fixed-rate mortgage payment will remain consistent throughout the loan’s lifetime. While other housing costs such as property taxes or insurance payments can change over time, the stability of your mortgage payments means you can comfortably plan for the future.

2. Home Appreciation

When looking back at home prices in previous decades, it can be startling to see just how much homes have increased in value. This is the glory of appreciation while it does make it more difficult to buy a home the longer you wait, it also means you will have secured a strong investment once you have purchased a home. While appreciation rates can vary greatly depending on locality, many NYC homeowners can see their home value double within five to ten years after their initial purchase.

3. Tax benefits

Many first-time buyers are often surprised to learn just how much they can save from tax benefits through homeownership. For example, if you’re a homeowner with a mortgage not greater than $750,000, then you can deduct the interest on that loan. This is one of the biggest tax savings of becoming a homeowner, but there are also others.

For instance, property taxes of up to $10,000 can be deducted each year, while energy efficiency upgrade deductions of between 22 and 30 percent can be made depending on the year the upgrade was installed. There are also home office deductions of $5 per square foot, up to 300 square feet if you use a portion of your home for business.

4. A hedge against inflation

At times, the economy can go through inflationary periods where the money you hold today will be worth less tomorrow. These inflationary periods can lead to a depletion of people’s savings and a dramatic increase in the cost of everything, including real estate. But if you have already locked in a mortgage rate on your home, then you won’t have to worry about spiraling housing costs. Better still, since your mortgage premium is going directly into an asset that appreciates over time, you’re actually building wealth with each payment.

5. Equity

When you pay rent, your money does directly into your landlord’s pocket and is lost forever. But when you make a mortgage payment, you’re building equity by investing money in your own asset. Equity is simply the difference between what you owe on your home and what it’s worth. Once you’ve paid off your mortgage, you will have 100 percent equity, meaning you can pocket the full amount in a home sale, minus any sales taxes. Which, given appreciation, is bound to be more than what you originally paid for the home.

Better still, homeowners can borrow against their equity, providing an easy line of credit for meeting important financial needs such as college tuition or a home renovation. The latter is usually the better option when borrowing against your equity as it will lead to further appreciation. Plus, any interest from a home equity loan that goes toward home improvements is fully tax deductible.

Final Thoughts

From the above advantages, it should be clear that homeownership can be a versatile and foundational part of any wealth-building plan. Once you have one home secured, the wealth it generates can be used to make further property investments that will set you and your family up for generations. It all starts with that first home purchase, which is why homeownership is worth pursuing no matter how long it takes.