Much has been said and written regarding the financial benefits of home ownership…but I’m a numbers gal and somewhat of a skeptic. I prefer to support “this vs that” statements with hard numbers. So that’s what I decided to do after reading another article generalizing the benefits of home ownership.
Let’s explore 3 areas of potential benefit – equity accumulation by paying a mortgage payment versus rent; potential increase in home value over time; return on investment with investment being defined as a down payment on a home.
Since I’m located in the central and southern California areas, it is not uncommon for monthly rents to be $3,000 for a 2 – 3 bedroom apartment between 1,000 and 1,100 square feed. Let’s look at Mosaic Apartments in Oxnard – apartments.com reports that a 2 bedroom unit rents for anywhere from $2,492 to $3,715 per month.
For this illustration, we’ll use the average of Mosaic’s lower and upper limits for a 2 bedroom, 2 bathroom apartment – right around $3,100.
Mosaic is a really nice place to live!! But, from a wealth building perspective, $3,100 per month is the equivalent of a mortgage payment on a $500,000 house…with just 5% down.
Let’s look at the rental numbers in the chart above – after 5 years of writing $3,100 rent checks (we’ll assume no increase in monthly rent just to stay conservative) a renter has spent $186,000 on housing.
Let’s look at home ownership numbers in the illustration below – after 5 years of mortgage payments totaling $3,230.28 ($499,000 purchase price, 5% down, payments consist of principal, interest, property taxes, homeowner insurance and pmi) equity through paying down the home loan is $46,155. This is essentially for the same monthly housing payment.
And this set of calculations does not factor in the income tax savings a homeowner receives due to the interest and property tax deductions.
One more set of numbers to explore is the estimated increase in value over time – we’ll use that same 5-year period and assume a very conservative increase in value of 1.5% per year…at the end of 5 years, a $499,000 home is potentially worth $537,000 – or more! The table below illustrates the modest year over year increase in value based on a growth rate of just 1.5%.
So, after 5 years of home ownership, a homeowner’s increase in wealth can look something like:
Equity built in home from mortgage payments – $46,000 plus (+) Equity built in home from increase in value – $37,000 equals (=) $87,000 net increase in wealth…all from your housing expense.
And again, just a reminder that none of these estimates include any potential savings on income taxes due to the interest, property taxes and mortgage insurance tax deductions so there are additional savings related to home ownership that renters do not benefit from.
Last, let’s explore just the first year’s return on your investment of $24,950 (the down payment).
In year 1, based on a modest growth rate of 1.5%, the net increase in value of your home is $7,485. After 12 mortgage payments, the loan has been reduced by $8,531. The total of these two calculations is $16,016.
$16,016 divided by $24,950 equals 64.19% return on your investment…in just 1 year.
Social proof – my own home which I purchased just 3 years ago…the purchase price was $415,000. Recent sales of the same model in my community have ranged from $454,000 to $474,000 far exceeding the 1.5% increase in value we’re using to model appreciation rates on. Appreciates rates do vary – some years the value doesn’t increase at all – same years the value zooms up by 4% or more.
If you’re ready to begin the process of becoming a homeowner, I’d welcome the opportunity to help you with your financing. I’ll put my 30+ years of number crunching experience to work for you to ensure you receive the best financial terms possible. Give me a call at (800) 680-7875 or if you prefer, send me an email message to Linda@LindaOnLending.com.
And if you’d just like me to get the process started, you can easily apply online. Your application comes directly to me and I personally handle your financing every step of the way!
One last piece of information – here are 3 homes you can buy in Riverpark for under $500,000 with just 3% down!