This lifelong goals article talks about the benefits of prudent homeownership.
We’ve long advocated homeownership as a great way to build wealth. We still believe buying a home of your own is an important early step toward lifelong financial freedom.
Because of recent turmoil in the mortgage markets and on Wall Street in general, one might be tempted to think that it is a mistake to endorse homeownership. We disagree; the only mistake is using shaky real estate investments as a short-term “get rich quick” strategy.
When you buy a family residence that you plan to live in for many years, it should be worth at least what you paid if the time ever comes to sell it. This isn’t true if you buy a home at an inflated price for short-term gain. While we continue to advocate homeownership for responsible consumers, we don’t advise speculating on properties that are overpriced. That kind of investment, like any other, requires a lot of homework and some risk.
If you buy a house at the appropriate price and settle in for the long term, fluctuations in the housing market don’t matter as much. By the time you get to the end of your 15 or 30 year mortgage, the market will not be the same as it is today. And even if the home you purchased isn’t worth any more than you paid for it, you will still have built up equity.
Equity is wealth. It might earn you profit as the house increases in value, it may stay roughly the same, or it may even decrease if the home’s value drops permanently. In any case, wealth that is stored through homeownership is an investment in your future that will make your life easier as the years go by.
Even if you overpaid for a home today, as long as you can keep making your payments, you may see the value rebound in the long term, negating any potential losses. And regardless of what you paid for a home, owning it outright is your goal. For most of us, 25% to 40% of our income each month goes to make a mortgage payment. Once you own the home, all of that income is freed up for your use. It’s like getting a huge pay raise.
None of this is true when you rent. Every dime you make in rent payments goes toward making someone else wealthy. You build no equity and move no closer to financial freedom. If you can afford it and you’ve done your homework, there’s no substitute for homeownership.
Remember, we’re talking about homeownership, not investing in real estate. Homeownership is a long-term goal, and value fluctuations in the short term should have no effect on your thinking. No matter what your home’s current value is, you still have a roof over your head and you’re still moving closer to owning the home with every mortgage payment you make.
Think about your retirement years, living in your dream home without a burdensome monthly mortgage payment. That’s what we mean when we advocate homeownership.