Measuring the Benefits of Home Ownership

Home ownership has always been part of the American Dream. Because of that, many people accept owning a home as the right thing to do without considering the benefits (or risks). If you are contemplating buying a home, you should know and review the advantages of the step you are about to take as well as any potential roadblocks you might face before you sign on the dotted line. (For more, see Homebuyers’ Walkthrough: Considerations When Buying a Home.)

Buying a home is one of the best long-term investments you can make. According to the Federal Housing Finance Agency (FHFA) House Price Index (HPI), U.S. home prices rose an average of 34.71% over the five-year period ending Dec. 31, 2017. On average, homeowners saw the value of their real estate investment grow by 6.94% per year during that period. That’s not a bad return on an investment that also provides you with a place to live.

There’s more to buying a home than the selling price and interest rate. You can expect to pay anywhere from 2% to 5% of the purchase price in closing costs. For this reason, buying a home is not a very good short-term investment. Experts say you should plan to stay in your house at least five years to recover those costs. Some of the most common closing costs include application fee, appraisal fee, attorney fees, property taxes, mortgage insurance, home inspection, first year homeowner’s insurance premium, title search, title insurance, points (prepaid interest), origination fee, recording fees and survey fee.

Appreciation, also known as home equity, represents the difference between how much you still owe on your mortgage and the market price or value of your home. Home equity or appreciation grows in two ways. As noted above, your home is likely to grow in market value over time. Your equity also grows as you pay down your mortgage, with less of your payment going toward interest and more toward lowering the balance on your loan.

While paying down your mortgage works the same no matter where you live, market-value growth varies with location. Although the FHFA says average home prices rose by 34.71% in the U.S. over the five-year period ending Dec. 31, 2017, prices in the Middle Atlantic census division only rose by 18.48%. Prices in the Pacific census division, however, rose by an average of 57.06% between Dec. 31, 2012, and Dec. 31, 2017.

To see how this might affect prices where you plan to buy, check out the full FHFA chart below:

U.S. Census Divisions

Percent Change in House Prices

Seasonally Adjusted, Purchase-Only HPI

Period Ended Dec. 31, 2017

Source: FHFA

After appreciation, the most-often-cited benefit of home ownership is tax deductions or savings. When you buy a home, you can deduct some of the expenses of owning that home from the taxes you pay to the government. This includes mortgage interest on both your principal residence and a second home, which can amount to thousands of dollars per year. Interest on home-equity loans or home-equity lines of credit (HELOCs) is also deductible if the funds are used to substantially improve your home. You can also deduct up to $10,000 in state and local taxes (SALT), including property taxes. 

The new Tax Cuts and Jobs Act, passed in December 2017, made substantial changes to the parts of the tax code that have to do with home ownership. Unless a future Congress amends the law, all provisions will expire after Dec. 31, 2025. 

The new law limits mortgage interest deductions to $750,000 of total mortgage debt, including for a first and second home and any home-equity or HELOC loans. The previous limit was $1,000,000 in mortgage debt plus an additional $100,000 in home-equity debt. There is an exception allowing $1,000,000 in total mortgage debt if you bought your home on Dec. 14, 2017 or before. This provision even applies if you refinance that older mortgage. Home-equity-loan interest is only deductible if the money is used for substantial improvements to the home on which you took out the loan. Previously, interest on up to $100,000 was deductible no matter how the home-equity money was used.

SALT deductions, including property taxes, are now limited to $10,000. Previously, all SALT payments were deductible, unless you were subject to the alternative minimum tax. Other new provisions include restrictions on claiming casualty losses except for federally declared disasters and no moving expense deductions except for active-duty military.

All these changes have lowered the value of owning a home – including the fact that, with the standard deduction doubling, also under the new tax law, fewer people will have enough deductions to file Schedule A instead of taking the standard deduction. So the fact that you are eligible for a tax deduction does not mean that it will end up being useful to you. The severe limiting of the SALT deduction will be particularly detrimental in lowering available deductions for people who live in highly taxed states.  

As you pay down your mortgage and reduce the amount you owe, without realizing it you are saving, as the value of your home is increasing, just like the value of a savings account increases with interest. When you sell, you will likely get back every dollar you paid out and more – assuming you stay in your house long enough. Over time the average 6+% return (interest rate) on your savings should more than cover your outlay.

Not all homes grow in value. The housing crisis of 2008 resulted in many homeowners being “underwater,” which means owing more on your mortgage than your home is worth. It doesn’t take a housing crisis for home prices to stagnate or drop. Regional or local economic conditions can result in home values that don’t keep up with inflation.     

One often-cited benefit of home ownership is the knowledge that you own your little corner of the world. You can customize your house, remodel, paint and decorate without getting permission from a landlord.  

Ownership comes with responsibilities. You must pay your mortgage or risk losing your home and the equity you’ve built. Maintenance and upkeep are your responsibility. You can’t call the landlord at 2 a.m. to have a leaky water pipe repaired. If the roof is damaged, you must repair it – or have it repaired – yourself. Lawn mowing, snow removal, homeowners insurance and liability insurance – all fall on you.

Eventually, you will sell your home. When you do, the law allows you to keep the profits and pay no capital gains taxes. That’s up to $250,000 (if you are single) and $500,000 (if married) of tax-free profit. This is for your main residence only (not a second or vacation home).   

Unlike stock, which can be sold within a matter of days, homes typically take much longer to unload. The fact that you may have access to $500,000 in tax-free capital gains doesn’t mean you have ready access. Meanwhile, you still must make mortgage payments and maintain the house until you sell it.

The benefits of home ownership come with risks. The trick is to weigh the one against the other. It’s important not to let emotion be more of a deciding factor than a rational comparison of pros and cons.

If you are a first-time homebuyer, consider taking an education course to learn more about homeownership benefits and risks. Some of these home buyer education courses are free; others may charge a small fee. (For more, see How to Buy Your First Home: A Step by Step Tutorial.)