Why Buying Your Own Home May Be the Smartest Decision You Will Ever Make - part 1

There are so many reasons for owning a home - the pride of having a place of your own, a chance to establish your roots, the joy of having a real home where you can express your own personality and style. But the best reasons to buy may be financial. In fact, buying a home may be the smartest financial decision you will make in your lifetime.

If you are a first time home buyer, thinking about buying your first home, you need to know what the advantages of buying are, and how buying a home compares to renting. There are three prime financial benefits of homeownership.

Principal reduction

Appreciation

Tax Advantages

Let's look at principal reduction. First of all, a quick explanation - with most mortgages each payment is divided into two portions, principal and interest. Interest is the lender's profit, the amount they charge for the use of their money over the time you hold the mortgage. Principal is the amount of the mortgage you are paying back each month.            

Interest is charged on the outstanding loan balance each month. This means that in the beginning years, you are paying mostly interest. But with each payment you make, you pay off a little more of the principal, and the loan balance goes down a little more each month.

For example, if you borrow $100,000 at 6.5% interest over 30 years, that means your mortgage payment each month is $632.07. On your first payment, about $542 will go to pay the interest, and just over $90 will go toward the principal, or paying back the loan. That means after one payment, your loan has been reduced by $90 to $99,910. The next month's payment is based on 6.5% of the new balance, so your interest portion goes down, and the principal pay- back goes up a little more.

Each month a little more of your payment goes toward reducing your principal, and you pay little less toward interest. If you stay in this house, and this mortgage, for the whole 30 years, you will pay off the entire mortgage and you will own the home free and clear.

But in the early years, you are paying off mostly interest, and chances are you won't be in that same home 30 years from now. Principal reduction is a benefit, but there are other, bigger, advantages to homeownership.

I'll have more on these benefits of owning in later installments.

Pete Thompson is an Illinois mortgage banker who provides superior mortgage service and competitive mortgage rates in Chicago, the Chicago area and throughout Illinois. Click here for a Free copy of The Real World Home Buyer's Guide - How to Save Thousands when Buying a Home and Getting a mortgage.