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Measuring the Benefits of Home Ownership
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BY JIM PROBASCO
Updated May 5, 2018
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.)
Attractive Long-Term Investment
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.
But … High Upfront Costs
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
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.
But … Location Matters
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.
