10 Benefits of Owning a Home
Whether owning a house is a financially smart move for you right now can be calculated, but what about the other benefits and drawbacks of home ownership? If you’re financially ready to have a place of your own, it’s time to think about these 10 often-overlooked benefits of owning a home.
1. You can control your monthly housing payment
2. You’ll build home equity with each monthly payment
3. Your home value will rise over time
4. You can use home equity to build wealth
5. You can convert your home equity to cash
6. You may get a tax deduction
8. You can make the home your own
9. Your family may benefit from the community you invest in as a homeowner
1. You can control your monthly housing payment
The 30-year fixed-rate mortgage provides homeowners with the foundation for a stable monthly payment. Gone are the days of anxiously waiting for the rent increase letters from your landlord.
The principal and interest payment on a fixed-rate mortgage stay the same for the life of the loan, and you can lower it by refinancing if rates drop over time. You can even choose to pay the loan off faster with a shorter term (like 15 years) if you’re comfortable with a higher monthly payment.
2. You’ll build home equity with each monthly payment
Each monthly payment builds equity when you own a home financed with a mortgage. Looking at the amortization schedule that came with your closing papers, you can see exactly how much you’re paying toward your interest charges and your loan balance.
At first, the bulk of the payment is applied to interest. But over time, the difference between your home’s value and your remaining loan balance increases — this difference is called your home equity.
Home equity can be converted to cash and used to:
- Pay for improvements that add value to your home
- Consolidate high-interest rate credit card debt
- Cover the cost of college educations or start businesses
- Purchase a vacation home rental property
The bottom line: Rather than rent payments that build equity for a landlord, you build equity in a home that’s your own.
Home Equity and Declining Home Values
It’s important to understand that when home values fall — as they did early this year for the first time in over 10 years — it can affect your home equity and, in turn, any loans you have that are secured by your home equity. If your home’s value drops drastically in a short amount of time, your lender might cut off of reduce your access to HELOC funds, for instance.
3. Your home value will rise over time
If you look at a graph of home values since the 1960s, one thing is clear: Home values usually increase the longer you own a home. This is called “appreciation” and simply means your home’s value will likely rise with time.
That said, homebuyers should be aware that the housing market has recently delivered a notable decline in home values. This February, the median home price fell year-over-year for the first time in over 10 years, according to data from the National Association of Realtors. The median home price in February 2023 was $363,000, compared to $363,700 in February 2022 — a 0.2% drop.
You can track the value of a home using a home value estimator or look at online homes for sale in your neighborhood to get an idea of how much your home might be worth. You can also make home improvements to boost your home’s value, and plenty of fixer-upper mortgage programs allow you to roll the costs of those projects into one new home loan.
4. You can use home equity to build wealth
The ability to build equity from regular monthly payments combined with housing price appreciation gives homeowners a powerful advantage over renters in building their net worth. In fact, the Federal Reserve’s most recent Survey of Consumer Finances shows the median net worth of homeowners through 2019 was $255,000 compared to a median net worth of $6,300 for renters.
5. You can convert your home equity to cash
There are several ways to tap into your home’s equity. Lenders don’t restrict what the cash is used for, so you can apply it to any financial goal ranging from debt consolidation and home improvements to business startups and real estate investment portfolio building.
There are four ways to tap your home equity:
- Cash-out refinance. A cash-out refinance involves taking out a larger loan amount than you currently owe and pocketing the difference in cash. Most lenders allow you to borrow up to 80% of your home’s value for this type of refinance.
- Home equity loan. A home equity loan is a popular choice if you prefer to borrow against your home’s equity without paying off your current first mortgage. You’ll receive funds in a lump sum and typically pay a fixed rate that’s slightly higher than what you’d get with a cash-out refinance.
- Home equity line of credit (HELOC). A HELOC works like a credit card secured by your home. You only make payments on the amount you use, and you can pay off and reuse the credit line for a set time that usually lasts 10 years.
- Reverse mortgage. Homeowners 62 years or older can convert their equity to cash or even income with a reverse mortgage. This specialized program for seniors has an added benefit: No monthly mortgage payment.
CONVENTIONAL RATE CHANGES FOR 2023
Beginning May 1, 2023 the rules for conventional loans are changing in ways that can affect borrowers tapping their home equity.
- Cash-out refinances are getting more expensive. Expect to see higher interest rates or an extra fee at closing if you’re taking cash out and borrowing more than 30% of your home’s value. The fee will range from 0.375% to 5.125% of your loan amount, depending on your credit score and LTV.
- Borrowers refinancing a home with a second mortgage — like a home equity loan or HELOC — that will remain once the refinance is complete will also see higher interest rates or an extra fee at closing.
6. You may get a tax deduction
One major tax benefit of owning a home is the mortgage interest deduction. Home mortgage interest is tax deductible, which could mean a reduction in federal taxes you owe. This benefit is typically the most helpful in the early years of a 30-year fixed mortgage when most of your monthly payments go toward interest rather than principal.
However, the mortgage interest deduction isn’t the only tax benefit of homeownership. You can also deduct:
- Mortgage insurance costs. If you make less than a 20% down payment or take out a loan backed by the Federal Housing Administration (FHA), you’ll generally pay mortgage insurance premiums. Depending on your income, you may be able to deduct your mortgage insurance premiums.
- Property taxes. You can deduct up to $10,000 worth of property taxes if you’re single or married filing taxes together. The deduction limit drops to $5,000 if you’re married but filing separately.
7. You’ll build credit
A study of millennial users found millennial homeowners had a median credit score of 692, compared to 601 for non-homeowners. Higher credit scores give homeowners an extra advantage: When mortgage rates drop, homeowners can snag a lower rate and payment while renters are stuck with the same monthly rent payment regardless of their high credit scores.
Higher credit scores may also help homeowners avoid trouble with their monthly payments. In the LendingTree study cited above, renters averaged 10 late payments on their credit reports compared to 6 for homeowners.
8. You can make the home your own
Whether painting a child’s room their favorite color or customizing a game room in the basement, owning a home gives you the power to modify it however you choose. You don’t have to ask a landlord’s permission to make changes.
You won’t have to pay extra for your pet, and each year’s worth of mortgage payment pays down your balance, bringing you closer to owning your home free of any loan balances.
9. Your family may benefit from the community you invest in as a homeowner
Owning a home adds an element of stability to day-to-day living that renting can’t match. When you own a home, there are added social benefits worth noting.
You don’t move as much
Homeowners tend to move less than renters, which could give them a sense of security. In fact, a Redfin analysis of historical county records in 2021 found that the average owner will stay in their home for at least 13.2 years. According to a 2022 Federal Reserve report, three-fourths of people who moved in 2021 were renters.
Part of that may be the stability a fixed mortgage payment offers versus the constant threat of a rent increase. Renters also face the prospect that a landlord might not renew their lease, forcing them to find a new place to live.
Your children may do better in school
Studies have consistently shown that homeownership contributes to higher high school graduation rates and qualifications for college education for children. Some of this may be attributed to the control homeowners have over the condition of their homes, and involvement in community organizations like homeowners associations (HOAs), local school boards and other civic activities.
You’re less likely to need public assistance
Having equity in a home, with a reserve of it in the form of a home equity line of credit (HELOC), can give homeowners an advantage if they are suddenly laid off. Access to this equity reduces homeowners’ reliance on public assistance.
Lenders are also required to follow strict policies to help financially challenged homeowners. Options range from temporarily delaying mortgage payments with a forbearance to permanently re-negotiating the terms of a mortgage to make it more affordable with a loan modification.
10. You may enjoy homeownership health benefits
A 2019 survey of Habitat for Humanity homeowners found 74% saw an increase in their families’ health. Some of that may be due to homeowners’ perceptions that they’re safer living in a neighborhood with other homeowners who take pride in their home and community.
You’re also not at the mercy of a landlord to fix a moldy vent, problem plumbing or a heater that doesn’t work well in the winter. You can use your home equity to replace inefficient air conditioning, drafty windows or make improvements to your home so it’s as safe and healthy as possible for you and your family.