What are the Potential Financial Benefits of Owning a Home?

Raziel Ungar

April 15th, 2011 - 2 min read
email

Even though it is typically not advisable to buy a home to live in for the sole purpose of an investment, there can be significant financial benefits of buying a home. Here are some examples using a purchase price of $1,000,000, a loan of $800,000 and an interest rate of 5.00%, plus homeowner’s insurance of $80/mo and property taxes of $1,000/mo:

1)    Principal Pay Down: In the above example, the payment on the $800,000 loan would be $4,294 per month.  Of this amount, approximately $960 per month is going to pay off the principal each month, which increases your equity in the home by this exact amount.

2)    Tax Deductions: The tax benefits of buying a home can be significant.  In the above example.  If you add up the TOTAL cost of housing each month, here is how it would look:

  1. Mortgage Payment: $4,294/mo
  2. Homeowner’s Insurance: $80/mo
  3. Property Taxes: $1,000/mo
TOTAL: $5,374/mo

Of this amount, the interest paid on the mortgage payment and the property tax should be tax deductible.  In this scenario, that would equate to $3,333 in interest and $1,000 in property tax, for a total potential tax deduction of $4,333/mo.  Assuming a 33% tax bracket, the home buyer should earn a $1,444/mo tax refund; which quickly lowers the $5,374 total housing cost to $3,930 ($5,374-$1,444).  And remember, of that $3,930 out-of-pocket net cash flow each month for housing also includes about $960 in principal; so the true cost of owning this house would be $2,970/mo.  Taking it a step further, if the future home buyer is renting now for around $3,000, it is equivalent to buying a home with 20% down for $1,000,000.

3)    Appreciation:

Appreciation is the third component of the potential financial benefits of owning a home.  In the above example, if the home appreciates at a rate of 4% annually (which represents the average annual home appreciation for the last 50 years), then your home would appreciate by $40,000 in the first year and will increase incrementally in future years.  So far, we’ve learned that the true cost of owning this home would be $2,970/mo, or $35,640/year.  Assuming the home appreciates at a rate of $40,000 per year, the appreciation amount more than covers the cost of living there! (not including maintenance).

As you can see, the financial benefits of owning a home can be considerable.  Of course, make sure to consult with a CPA to figure out your specific financial benefits of home ownership as well as to understand the tax implications for your particular situation.

Helpful Links
About Us
For Buyers
For Sellers
Communities
Blog
Properties