Buying a Home

 Has 3 Great Advantages

Let's say a buyer puts down $10,000 (plus closing costs) to buy a $110,000 home.  The remainder is financed with a 30-year mortgage at 6.5%.  Monthly principal and interest will be $632 and monthly property taxes $115, a total of $747 - about the same monthly cost as a renter paying $750 per month (rental rates have increased an average of 3% per year over the last 10 years - so this renter will pay $978 per month in 10 years).

(1) Taxes:  The buyer has something that a renter does not.  Assuming the buyer is in the 30% income bracket, the mortgage interest tax deduction the first year is $162 per month; the buyer also receives a tax deduction for property tax of $34 per month.  That's a monthly tax deduction of $196.

(2) Appreciation:  The benefits don't stop with taxes.  On average, homes nationwide have appreciated at 4.5% over the past ten years.  That's $4,950 on the $110,000 home in the first year.  In the second year, the home's value is $114,950 and appreciates another $5,173.  In year three, the home's value is $120,123 and appreciation $5,406.  You get the idea.

(3) And then there's equity.  That portion of the monthly mortgage payment dedicated to reducing the principal owned on the home will have added up as well.  By the end of year ten, the amount owed the lending institution will have been reduced to $85,620.  In other words, the owner's have accumulated $13,380 in equity they would not have realized if they had been renting.  After ten years a home that originally cost $110,000 could be worth $163,470, assuming a 4.5% appreciation rate.  Combining the increase in appreciation and the equity built up through house payments, the average household can expect to accumulate $66,850 in home equity in ten years.  Meanwhile, the renter who was paying $750 per month is now paying $978.