Much has been said and written regarding the financial benefits of home ownership...but I'm a numbers gal. I relate best to hard numbers and put together an analysis that supports the benefits of home ownership.
Let's explore 3 areas of potential benefit - equity accumulation by paying a mortgage payment versus rent; potential increase in home value over time; return on investment with investment being defined as a down payment on a home.
Since I'm located in the central and southern California areas, it is not uncommon for monthly rents to be $3,000 for a 2 - 3 bedroom apartment between 1,000 and 1,100 square feed. Let's look at Mosaic Apartments in Oxnard - apartments.com reports that a 2 bedroom unit rents for anywhere from $2,290 to $3,067 per month (note: this is the information posted as of this writing - advertised rent rates change daily).
For this illustration, we'll use the higher range for a 2 bedroom, 2 bathroom apartment - right around $3,000.
Mosaic is a really nice place to live!! But, from a wealth building perspective, $3,000 per month is the equivalent of a mortgage payment on a $500,000 house...with just 5% down.
Let's look at the rental numbers in the chart above - after 5 years of writing $3,000 rent checks (we'll assume no increase in monthly rent just to stay conservative) a renter has spent $180,000 on housing.
Let's look at home ownership numbers in the illustration below - after 5 years of mortgage payments totaling $3,230.28 ($499,000 purchase price, 5% down, payments consist of principal, interest, property taxes, homeowner insurance and pmi) equity through paying down the home loan is $46,155.
And this set of calculations does not factor in the income tax savings a homeowner receives due to the interest and property tax deductions.
One more set of numbers to explore is the estimated increase in value over time - we'll use that same 5-year period and assume a very conservative increase in value of 1.5% per year...at the end of 5 years, a $499,000 home is potentially worth $537,000 - or more! The table below illustrates the modest year over year increase in value based on a growth rate of just 1.5%.
So, after 5 years of home ownership, a homeowner's increase in wealth can look something like:
Equity built in home from mortgage payments - $46,000 plus (+) Equity built in home from increase in value - $37,000 equals (=) $87,000 net increase in wealth...all from your housing expense.
And again, just a reminder that none of these estimates include any potential savings on income taxes due to the interest, property taxes and mortgage insurance tax deductions - so there are additional savings related to home ownership that renters do not benefit from.
Last, let's explore just the first year's return on your investment of $24,950 (the down payment).
In year 1, assuming a modest growth rate of 1.5%, the net increase in value of your home is $7,485. After 12 mortgage payments, the loan has been reduced by $8,531. The total of these two calculations is $16,016.
$16,016 divided by $24,950 equals 64.19% return on your investment...in just 1 year.
Social proof - my own home which I purchased just 3 years ago...the purchase price was $415,000. Recent sales of the same model in my community have ranged from $454,000 to $474,000 far exceeding the 1.5% increase in value we're using to model appreciation rates on.
Appreciates rates do vary - some years the value doesn't increase at all - some years the value zooms up by 4% or more.
This is an analysis based on my own market - other markets will differ when it comes to potential appreciation rates. However, what doesn't change is the underlying math that systematically reduces the balance owed on your home, and adds to your overall wealth...all while providing shelter for you and your family.
Since I'm a numbers gal, helping clients find just the right loan to meet their financial needs is a great fit. I love using my focus on analyzing sets of numbers to help you find just the right loan for your unique financial profile, and would welcome the opportunity to help you with your real estate loan.
Linda Piper
Mortgage Specialist, Residential and Commercial
BRE 01110003 | NMLS 424824
Cell/text: (714) 403-2603
Broker:
Planatek Financial, Inc.
340 N. Westlake Blvd, Suite 240
Westlake Village, CA 91362
BRE 01329960 | NMLS 328893
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