When deciding whether to rent or own a home, several key factors should be considered. When you own a home, your monthly payment helps you build greater control over one of the biggest assets you may ever own. The example below illustrates three key benefits of owning a home instead of paying rent, which does not contribute to your wealth. (1) The interest paid on a mortgage becomes tax-deductible, (2) you are forcing yourself to save the principal amount every month (no equity gained when renting), and (3) your home appreciates in value over time (renting doesn’t).
Net Worth Tip #1: Once your home appreciates, you will have equity to put toward a new home. At that point, your old home can become your rental property. The strategy is to lease it for an amount close to or above your PITI (Principal, Interest, Taxes, Insurance) payment. This approach helps build wealth because you now control two appreciating assets.
If you feel you cannot afford a home, consider this example:
If you are paying $2500 in rent and the projected payment for buying is $4000 per month (Principal, Interest, Taxes, and Insurance), the truth is that the payment feels impossible for most people. But, it is good to remember that the payment will be the same for the next 30 years (assuming a 30-year fixed-rate loan), and you’ll likely have an opportunity to lower your rate in the near future to lower that monthly payment (assuming that rates start falling as projected by the Fed).
Also worth noting, that if you are in a career that increases your salary by the average of 3-4% per year, it will soften that payment, and any big promotion will really make a difference. The strategy for buying and building wealth is to buy sooner than later so that you’re getting a payment locked in at current prices. If you forgo the wait and buy now, then you are gaining that 3% in equity rather than waiting and paying a higher monthly payment later.
Net Worth Tip #2: As inflation persists, it erodes the purchasing power of our dollar over time, but it also tends to inflate the value of the wealth-building assets we already hold. To take advantage, start acquiring assets now and watch them grow as inflation rises. Consider buying a home—the greatest asset you may control right now.