What are the Potential Financial Benefits of Owning a Home?
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:
- Mortgage Payment: $4,294/mo
- Homeowner’s Insurance: $80/mo
- Property Taxes: $1,000/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.
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.