The Power of Homeownership

Brian Burton

Key Takeaways:

  • Having a fixed-rate mortgage keeps a large portion of your budget constant versus the variability of rental costs
  • Lower expenses in retirement creates more disposable income, greater flexibility in combatting rising costs, and the ability to invest
  • Saving what’s left rarely works – making monthly mortgage payments creates a forced savings vehicle saving us from ourselves
For generations we’ve been taught that owning a home is the primary foundation for building household wealth and creating financial stability. Although it requires some financial sacrifices and sound decision making, this advice still applies today. A 2019 U.S. Census Bureau report¹ on household wealth revealed a striking wealth inequality between homeowners and renters: homeowners’ median net worth is 80 times larger than that of renters. While this survey does not indicate cause and effect, it does reveal that homeowners are wealthier than renters at every income level, and the majority of homeowner wealth comes from housing for every income group other than the very top earners.
In addition to building wealth, here are four other important benefits of owning your own home:
Budget stability – taking on a fixed-rate mortgage means not worrying about housing costs going up as monthly principal and interest payments will remain the same for the life of the loan. Given that housing expenses are the single largest budget item for most, keeping these costs constant is a big benefit versus the instability of rental costs. As a bonus, if your income rises throughout your career, this fixed expense comes to represent a small portion of your cash flow.
Lower retirement costs = better investor – having one less monthly debt payment to worry about in retirement creates more disposable income at a time when flexibility is key. With other unavoidable cost increases such as health care, eliminating the biggest expense in our budget leaves room to better manage variable costs. With lower expenses we may also be afforded the opportunity to invest money each month versus drawing down investments, eliminating sequence of return risk.
A mortgage can save us from ourselves – invested the difference between our monthly income and expenses is great in theory, the fact is that unless the savings is automatic it rarely works. Having a mortgage provides an opportunity to continuously save for the future by directing funds toward an asset that has the ability to appreciate over time versus spending discretionary income on depreciating assets. For those that tend to be spenders, having a mortgage can act as a forced savings account that can build a significant amount of equity over time.
Can provide the next source of liquidity – having equity in your home allows the opportunity to borrow money through a home equity loan or line of credit. Having this source of liquidity provides flexibility for financing home improvements, paying medical bills, or in other times of financial need.
There are many advantages to owning a home, including several that aren’t discussed in this article, but the benefits of homeownership don’t come without costs and limitations. Buying a home is an enormous financial decision, likely the biggest one many of us will make, and for some renting may be a better option. If you or a loved one is considering home ownership and would like help weighing the pros and cons, please don’t hesitate to reach out.
SOURCES:
¹Eggleston, Jonathan and Donald Hays; Many Households Do Not Have Biggest Contributors to Wealth: Home Equity and Retirement Accounts; United States Census Bureau; August 27, 2019; https://www.census.gov/library/stories/2019/08/gaps-in-wealth-americans-by-household-type.html
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