Why is buying a House considered a Good Investment?

The financial crisis of 2007 to 2008 has driven many Americans to make a terrible mistake; they are refusing to buy a home. A home is still a great investment; despite the risks that became all too apparent in the last decade.

A reasonably-priced home; with a sound mortgage, is still one of the best purchases that an average person can make. There is no other investment out there that provides the typical family, couple or individual the advantages that a home will.

Unfortunately, many of us have forgotten about those benefits, because of the subprime crisis and real estate bubble in the 2000s. The very real advantages still outweigh the potential risks of home ownership.

Even though many of the benefits of home ownership are obvious, quite a few people are unaware of them. To help these people make an informed decision, we will review the reasons why buying a home is a wise investment strategy.

A Mortgage is a Forced Investment and Savings Plan

One of the biggest advantages to home ownership and one that is least talked about: a mortgage is a forced savings and investment plan.

Saving money is a very difficult task for most people – even those with extra income often waste it on unnecessary expenses. A mortgage forces you to make a payment of several hundred or several thousand dollars into an investment; that builds equity every month. You have to make the payment, because if you do not, you lose your home.

Unlike stocks, a 401K, or a savings account a mortgage is an investment that you have to put money into whether you want to or not. This can help average Americans, because our culture teaches us not to save money. In our over-commercialized society, there is too much pressure to consume, spending every extra cent you have.

Saving is hard enough for average people, investing and saving for retirement can be even more difficult. Building up equity in a mortgage is easy, because the payment is money you would be spending on rent anyway. Home ownership allows a person to save without affecting his or her lifestyle, because the money invested is cash that would have been spent on rent anyway.

Buying a home allows you to save and invest; without affecting your lifestyle or reducing spending. A person with a limited income can invest several hundred dollars a month by taking out a mortgage.

Increased Financial Security

Money magazine recently reported that one in three Americans had saved no money for retirement. Many of these people will have nothing, but Social Security or a pension to rely upon when they retire.

In contrast, a person that bought a home; and paid off the mortgage, could sell the dwelling. If the real-estate market was good, that person would retire with several hundred thousand or even more than a million dollars in cash. That lump sum would make retirement far more comfortable.

Beyond retirement, the equity in a home has many other uses. A person can borrow against it to cover emergency expenses, or sell the home for extra cash at any time.

Paying mortgage payments every month can also improve your credit rating; which can make it easier to get loans, credit cards and other kinds of financing. A good credit rating will make it easier to get a lower interest rate, and pay less for financing.

Pride of Ownership

There is also a psychological benefit to homeownership that many people ignore: the sense of pride a person gets from having a home to call their own.

People that own their home are more likely to care for the property and take an interest in their communities. They are also more likely to get the satisfaction that comes from caring for a home. Homeowners are in a position to landscape, repaint and remodel all of which can be enjoyable activities.

There are many fun and relaxing activities associated with home ownership such as gardening, entertaining friends and projects around the home. Many of these activities are good exercise as well as fun. The pride and satisfaction that a person gets from painting the house or seeing the flowers in bloom can be incredible.

A home can provide you with psychological and health benefits that a stock or a bank account cannot. The neighbors will never see your stock portfolio or bank account.

A Home can Guarantee Privacy

The worst aspect of apartment life is the lack of privacy. Many apartments are built with windows that other tenants; or the manager can easily look in and spy upon residents.

Some apartment buildings have shared laundry rooms that are inconvenient; and allow your neighbors to see you in your underwear. In others, it is possible for neighbors to listen through the walls, or see into your apartment if the door is open.

To make matters worse, there is no telling who your neighbors might let into the apartment building. Some tenants will leave the front door unlocked so anybody can wander in.

Despite its cost; a house or townhome, comes with the benefit of privacy. The door will always be locked, because you are the one locking it. A house can also be back from the street so nobody can look in and see what you are up to. Most importantly, there is no landlord or manager; with a key to your place, who can simply let himself or herself in any time he or she feels like it, when you own.

Do not Buy Too Much House

The reason so many people got into trouble during the real estate crash of the 1990s; was that they bought too much house. Many of them compounded the problem by using Adjustable Rate or ARM, balloon and other mortgages to finance far more than they could ever payback.

Such a situation can be avoided if you purchase a home that you can actually afford; with a straight 20 or 30-year mortgage. The key to not ending up in foreclosure is to understand how much house you can actually afford.

A good rule of thumb is never spend more than 28% of your income on housing. That means the mortgage payment should never exceed 28% of your monthly take-home pay. This should give you enough money to live the lifestyle you want while buying a home.

Find the Mortgage Payment you Can Afford

Another excellent rule of thumb is not to rent; if the mortgage payment is higher than the monthly rent for a comparable home in your community. Renting is a better deal in that situation because of the added costs of home ownership; such as performing or paying for your own maintenance.

The New York Times Rent Calculator can show you if renting is a better deal in your area. The most important figure to look at is the final total of costs after nine years, located on the right side of the screen under the payment amount. If rent and buying costs are equal; or if buying costs are lower than renting, then buying is a good deal in your area.

Play around with the calculator and check out such factors as the amount of down payment, interest rate, and length of the mortgage. These can show you how much will need to pay up front to buy in your community.

A Mortgage can reduce your Tax Bill

After the ability to accrue equity the biggest advantage a mortgage provides over is its ability to reduce your income tax bill. Both mortgage interest and property are taxes deductible under the current tax code.

Interest paid on first and second mortgages up to $1 million is deductible for all categories of taxpayer except married filing separately. Married couples filing separately can deduct mortgage interest up to $500,000.

The yearly tax savings from a $200,000 mortgage would be $3,390, according to Bankrate.com. Bankrate’s Mortgage Tax Deduction Calculator can show you how big your tax benefit might be.

A Great Investment

When purchased properly a home can be an investment that reduces your tax bill, does not crimp your lifestyle, and provide you with immense emotional satisfaction. Even though home ownership is not for everyone; everybody needs to consider the benefits of home ownership.