Take a spin through the cable channels on any given day (first you have to find someone over the age of 40 who still pays for cable) and you’ll find countless shows about homeownership: buying, selling, searching, flipping, trading, designing and redesigning. If you have the patience to sit through that full half hour of television, you will undoubtedly come across at least one commercial with an actor pretending to be an obnoxious realtor to remind you that homeownership is the ultimate success symbol. You’ve made it. You are a financially secure grown up and you own a home.
At Homewise we have a slightly different take on this message. Of course we love homeownership. It’s in our name after all. But we don’t see it as something you achieve after you’ve become financially secure. We see it as a way to become to financially secure in the first place. It’s not the prize at the end of the journey to financial security. Rather, it’s the road that gets you there. Here’s how:
For most households, the biggest monthly expense is housing. Homeownership stabilizes that expense by locking in the principal and interest payment. Only a small portion of the payment can increase, the portion that goes toward taxes and homeowners insurance. Compare that to renting where your monthly payment can increase with inflation year after year. Let’s do some math on that: if we assume 2% yearly inflation, a homeowners’ monthly payment would only be about $65 higher 10 years after buying their home. Meanwhile, a renter’s monthly payment would have increased by over $300 in that same time period. That’s hundreds of dollars every single month year after year that the homeowner can use to build savings, meet expenses, and invest in their businesses.
Homeownership also creates a sort of automatic savings account, ideal for those whose savings discipline is maybe a little less than perfect. Each month, a portion of a mortgage payment goes toward paying down principal, building up the owner’s equity. And that portion increases each month. On a typical $250,000 mortgage, a homeowner would accumulate about $45,000 of equity in 10 years simply from this principal pay-down. That doesn’t include any market appreciation. It’s just the automatic savings effect of paying down a mortgage.
But let’s not forget about that appreciation. It’s the most difficult part of this math to predict but even with modest appreciation of only 2% per year, the owner of a $250,000 home would enjoy over $50,000 in appreciation in ten years. Add that to the equity accumulated through the principal pay-down and the owner has about $100,000 of wealth to her name just by making her monthly housing payment. And while it may be hard to predict what appreciation will be for a homeowner, it’s easy to predict what it will be for a renter: zero.
Can you imagine having a landlord say to you “I will put a portion of each rent payment into a savings account that you can cash out when you move and also I will promise to renew your lease forever as long as you make the payments and also I will never raise your rent.”? Neither can we. Unless you are your own landlord. When you put all these financial security effects together, you can see why Homewise loves homeownership so much (obnoxious realtor commercials notwithstanding).