Home buying as an Investment

Buying a home is likely the biggest financial commitment you'll ever make, and understanding how it works as an investment preserves cash and peace of mind.

This page:

  • Describes home buying in investment terms

  • Lists a few tax and leverage benefits

  • Explains financial risks involved in home buying

This section lays the groundwork for an easy home loan process. In the following pages we discuss fixing your credit, securing a mortgage pre-approval and compiling the necessary documentation for your mortgage.

Home buying as an investment

Buying a home, like any investment, has its pros and cons, risks and rewards.

The most tangible reward of buying a home is simply being a home owner. Owning is almost always better than renting. Instead of kissing your rent check goodbye every month you'll be putting it towards your future.

However, contrary to what most people think, home ownership won't provide a great return on your dollar. Investing in the stock market is usually a more profitable use of money. Most homes appreciate in the low-to-mid single digits annually, and the stock market's returns are higher.

Buying a home is better compared to investing in the bond market, in terms of both stability and rate of return.

But considering that the vast majority of Americans either own their own home or plan on doing so in the future, the advantages must be significant. And they are. In terms of leverage, building home equity and tax savings, and personal satisfaction, buying a home is a very worthwhile investment.

The financial benefits of owning your home

As an investment, home buying has a lot of leverage because you get a big immediate return for relatively little money down. (You'll pay for the whole house eventually, of course, but your immediate gain, a new house, is pretty big.)

And, as you pay down your mortgage, you're constantly building equity (simply a word for the amount of house you actually own). Equity can be very useful for securing future loans or lines of credit because it makes you a more attractive investment risk. You'll be able to secure loans at lower rates and for larger amounts as your equity grows.

Then there are the tax advantages to owning a home. Interest on your mortgage is tax deductible and even interest on debt secured by your home is usually deductible.

(So if you open a home equity line of credit down the road, you'll be paying a much lower rate than you would on a credit card and your interest will be deductible. How's that for a tax break?)

On the flip side . .

There are risks in buying a new home, and they can be especially considerable if you don't have a clear understanding of home mortgages. In today's rather liberal loaning environment, it is very easy for home buyers to over-extend themselves financially (as we've seen), and foreclosing on a home mortgage can haunt you for a long time.

But you can avoid this possibility by learning about how a mortgage works, how to measure your needs and capabilities, and what type of loan works best for you.

We can't emphasize enough how important it is to have a good grasp of the costs and options of home mortgages. And understanding mortgage interest rates is a very good place to start . . .



Next: How timing mortgage interest rates will help you save.

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