Your Home Investment (5/7/2019)
With the 2018 tax filing deadline behind us, we see that many taxpayers used the increased standard deduction this year rather than itemizing as they have in the past. Taxes and interest from your mortgage are often one of the major deductions in itemizing. By not itemizing, you lose the tax deductibility of mortgage interest along with property taxes. This may cause some to reconsider the benefit of home ownership as an investment.
Before you decide that owning a primary residence allows you to come out ahead, it’s important to consider how much you spend on it over time. The simple idea is that if you buy a home for $200,000 and you sell it for $500,000 down the road, then $300,000 is the profit. The long-term costs involved also need to be reviewed.
Mortgage interest can be a big expenditure to start with. If you buy a home for $200,000 at 4%, you will end up paying approximately $143,739 in interest over 30 years. Additional costs include property taxes, homeowner’s insurance, maintenance, repairs, upgrades or remodels, and yard care. By the time you add up everything over the course of several years, there’s a good chance your profit will be small if any.
Location is extremely important when you are weighing the overall investment of home ownership versus renting. Fast-rising home prices and higher mortgage rates have made it cheaper to rent a home than to buy and own one in many areas. According to Realtor.com, the monthly costs of buying and owning a home that you occupy are up 14% over the past year with rents up 4%. Renting and reinvesting the savings from renting could outperform owning and building home equity, in terms of wealth creation.
A home can still be valuable even if you don’t end up with a real profit by the time you’ve paid all your expenses over the years. It can be collateral to obtain a home equity loan or line of credit. You have the lifestyle perks of being able to do what you want with the home, putting down roots in the community, and providing a safe place for your family. A paid-off home can provide you with low-cost housing during retirement.
The key is to decide what you want out of your home. If you are looking for a true real estate investment, maybe a primary residence is not the answer. If you want returns beyond just money, buying a home still has much to offer.
Lisa A. Dugan
May 7, 2019