| Why Homeownership is a good idea The Best Investment As a fairly general rule, homes appreciate about four or five percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region. Homes located South of the River have been appreciating at 10% per year for the last 4-5 years. While this won’t last forever, appreciation in the Minneapolis ST. Paul Area has been positive for the last twenty years. This is due in large part to a stable workforce, diversity of jobs and an above average education level. How it works You bought a $200,000 house with 20% down - that would be an investment of $40,000. At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual "return on investment" would be a whopping twenty-five percent. Of course, you are making mortgage payments and paying property taxes, along with a couple of other costs. However, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase. Income Tax Savings Because of income tax deductions, the government is subsidizing your purchase of a home. All of the interest and property taxes you pay in a given year can be deducted from your gross income to reduce your taxable income. For example, assume your initial loan balance is $150,000 with an interest rate of eight percent. During the first year you would pay $9969.27 in interest. If your first payment is January 1st, your taxable income would be almost $10,000 less – due to the IRS interest rate deduction. Property taxes are deductible, too. Whatever property taxes you pay in a given year may also be deducted from your gross income, lowering your tax obligation. Imagine how much rent might be ten, fifteen, or even thirty years from now? Which makes more sense? Forced Savings Some people are just lousy at saving money, and a house is an automatic savings account. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it accelerates. Second, your home appreciates. Average appreciation on a home is approximately five percent, though it will vary from year to year, and in some years may even depreciate.. Over time, history has shown that owning a home is one of the very best financial investments. Finally, renting, in most cases, is not an investment and can actually cost you money. Imagine how much rent might be ten, fifteen, or even thirty years from now? Which makes more sense? |
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