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Tim Phelps

NMLS ID 41552

804-424-2200 tphelps@tidewaterhomefunding.com

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Building Wealth Through Homeownership

Building Wealth Through Homeownership

April 13th, 2020

In our current climate, most people are probably in “survival” mode so when it comes to finances, they’re focusing more on making sure they can cover all current expenses, supporting their families, and looking at the short-term vs long-term financial plan. Financial “extras” like investments may have taken a back-seat to paying the bills and padding emergency funds. Financial experts are paying close attention to the market and taking things day by day. But if homeownership was in your financial plan, don’t write it off just yet. If you’re in the position to think about long-term finances right now, homeownership is still one of the best ways to build wealth in America. 

Wealth is subjective. Wealth can mean having X-amount of money, a well-funded retirement, being debt-free, or financial freedom. Chances are, one of the aforementioned items is on your list of financial goals, if not all of the above. Investing in real estate and becoming a homeowner is a stepping stone to building wealth and achieving your financial goals. 

Since defining “wealth” may look different for everyone, there’s no one blueprint for how to obtain it. But there are certainly several consistent factors involved that contribute to one’s wealth including: 

  • Income
  • Budget/savings
  • Existing debt
  • Goal setting

Of course this is just part of what determines someone’s wealth. Other factors including discipline, confidence in financial knowledge and planning, and family affairs all play a role in your financial profile. Determine what wealth means to you and make a financial plan to get started on your path to homeownership! 

How Homeownership Can Help Build Wealth

While no method investing is fool-proof, investing in real estate is often a better and quicker method of gaining a profit than other forms of investment. Because investment is based on preference, we can’t really say if homeownership is better than stock investments, but real estate willbuild you wealth steadily over time due to appreciation. It’s statistically proven that homeowners have a higher net worth than renters. The median net worth of homeowners is 80 times larger than renters, according to data from the US Census Bureau.

Looking at simple math can illustrate this point of steady wealth building. A typical homebuyer takes out a 30-year fixed-rate mortgage. After 30 years, there is no mortgage (or rent) payment. The average price of a home thirty years ago in 1990 was $122,900. Today, that home costs at least $315,000. That $315,000 is the housing component of the owner’s wealth. Even if home prices did notrise in thirty years, that person would still have $122,900 in wealth today on top of not having to make mortgage payments after thirty years.

It doesn’t always work out that neatly in real life. Most people don’t spend thirty years in the same house. Most homeowners upgrade from their starter home or change locations at some point. However, they’re able to make these changes without any major hit to their finances because of the equity they’ve accrued, even if over a short period of time, and can apply that equity to a new down payment. 

Historically, real estate values almost always rise or appreciate, in which case you can sell your home for more than you bought it for. Unlike a lot of other purchases that actually depreciate in value over time like a car. When you’re renting, you’re not building equity, and that same amount you’re paying in rent could be put towards a monthly mortgage payment! 

Homeownership is not without its challenges and expenses. There are things like Homeowners Association (HOA) fees, maintenance and upkeep, coming up with a down payment, homeowners insurance, and property taxes. But if you make a solid financial plan, and are working on saving towards a down payment, homeownership may actually be more fiscally responsible than renting. 

If homeownership has been on your mind, give us a call and we can start talking about a financial plan that works for you. See our latest blog about buying a home during covid-19 to learn more about how to pursue homeownership in the current financial climate.