It has always been the American dream to own a home with a yard surrounded by a white picket fence. Although this might be a bit of a cliché, it is certainly grounded in truth. For many Americans, home ownership marks the entrance into the world of investing.
Why is home ownership such a good investment?
The answer is simple. Because over time, as your mortgage balance decreases, your equity increases, even if the value of the home fails to follow. And equity grants you the ability to take money out of your home, and use it as the need arises. No matter how much rent you pay over the course of your lifetime, you never establish equity.
Another huge benefit of home ownership is in regards to taxes. Homeowners can claim mortgage interest deductions that aren’t available to renters. In addition, the profit you earn from selling your home might be exempt from the capital gains tax you would pay on profits earned from an ordinary investment. Under the current tax code, if you sell your home and it was your primary residence for two out of the past five years, you don’t have to pay any capital gains tax on the first $250,000 in profits. If you are married. the amount exempt from capital gains tax increases to $500,000.
Home ownership also creates leverage. Leverage is a strategy that allows a person to use borrowed money to their financial advantage. When you buy a home, you typically make a cash down payment of 20%. The other 80% is financed through a mortgage. During the next several years, the value of your home usually increases, making it worth more than the amount you originally paid. When you later decide to sell, after you pay off your original mortgage, you will realize a profit equal to the percent of increase in the value of the home. This is what’s known as leveraging debt to make a profit.
Of course, all of these benefits of home ownership are only available if you have the capability to afford a home.
So the next question is, how affordable are new homes to the average American?
According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index, nationwide housing affordability was near its highest level in 2009. Housing prices are low, and interest rates are affordable, creating a buyer’s market. In fact, in the third quarter of 2009, the HOI showed that about 70% of homes sold were affordable to families who earned $64,000, the national median income.
Given the current, attractive market conditions, is now the right time for you to enter the housing market? Speak with one of our financial planners, and consider the possibility of realizing the American Dream.