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Is Home ownership Still the Best Path to Financial Stability

Even though the housing market has recovered from the 2008 recession, rising market prices have made it tougher for first-time buyers to make the jump from renting to owning.

Still, polls show that Americans still like the idea of owning a house. According to a 2016 National Association of Realtors survey, “87% [of customers] said homeownership is part of their American Dream.”

And when home ownership creates long-term positive benefits for your bank account, it’s no wonder potential buyers seek financial stability through a mortgage.

Here’s everything you need to know about how home ownership can impact your financial future:

1. A Chicken & Egg Scenario

Before we get ahead of ourselves, it’s important to note that the ability to apply for a mortgage and own a home is itself a predictor of financial stability.

Most Americans who own homes have a net worth of around $195,000, according to Forbes - which places them solidly in upper-middle class and upper class income brackets.

“That is, a typical homeowner will be ahead of a typical renter by a multiple of 45 on a lifetime financial achievement scale,” reports real estate expert Lawrence Yun.

Younger, poorer demographics struggle with saving and poor credit histories, making homeownership less feasible. Millennials - often saddled with school debt - are one example.

“I'm hoping that the Millennial Generation doesn't set its sights on homeownership as a benchmark of economic stability, because it's going to be out of reach for so many of them that it will just be a recipe for frustration,” sociologist Katherine Newman told NPR.

Still, for those who can afford homeownership in less expensive parts of the country, there are plenty of long-term financial benefits to buying a home.

2. Build Wealth and Equity Over Time

One of the most obvious reasons to purchase a home is to build wealth and equity over time, since the value of homes usually trends upward after the closing date.

According to The Balance, rising neighborhood values are one of the biggest contributing factors to growing equity, as are improving your property through home repairs and chipping away at your mortgage.

“[If] you’re lucky, home values in your market might simply rise over time, without any effort on your part,” writes Justin Pritchard. “This is most likely to happen in attractive neighborhoods and growing towns.”

Like other first-time buyers, you probably have your sights set on a house in the suburbs or a small city to cut down on costs. That’s often a financial bet that pays off, but competition in the housing market is currently fierce.

“There were 3% fewer homes on the market in February compared to a year ago, according to a recent report from Zillow, and home values are up nearly 7%,” reports Kathryn Vasel at CNN Money.

The influx of buyers who already own property is making it that much harder for new folks to break into the housing market - so be prepared for a fierce fight for your dream home!

3. Pay Less in the Long Run

If you’re stuck paying high rents in urban areas, purchasing a house could help you save money over time.

“In the first few years, it may be cheaper to rent,” explains Michael Corbett at the Trulia blog.

“But over time, as the interest portion of your mortgage payment decreases, the interest that you pay will eventually be lower than the rent you would have been paying,” he adds. “But more importantly, you are not throwing away all that money on rent.”

Of course, you’re also investing in a property that should have more value over time, which both saves - and earns - you more money.

4. Stabilize Your Housing Costs

For Millennials, renting a home or an apartment can come with a number of financial advantages - especially if you’re planning on moving around in your late 20s and 30s.

“You can move more easily, since you don't have to worry about finding a buyer, and won't end up spending the $1,100 or more that the average homeowner shells out each year on maintenance costs,” writes Taylor Tepper of the benefits for renters.

On the other hand, if you’ve saved enough money for a down payment, you’re guaranteed a monthly mortgage rate that won’t fluctuate with demand - unlike your rent payment.

This will be especially significant for city-dwellers, since the cost of rent is likely to continue to rise more quickly than other expenses, according to CNBC.

5. Rake in the Tax Breaks

Our tax system was built to favor homeowners - which is why the government offers significant tax breaks for first-time buyers.

According to BankRate.com, your biggest tax break is actually your mortgage payment.

“[For] most homeowners, the bulk of [your mortgage] check goes toward interest,” explains personal finance expert Kay Bell. “And all that interest is deductible, unless your loan is more than $1 million.”

The true benefit, though, comes from accumulating enough deductions to start itemizing, reports Jeff Reeves at USA Today.

“Getting enough qualified expenses can top the standard deduction and push you over into itemizing, and allow you to deduct so many other expenses you wouldn’t be able to otherwise,” CPA Lisa Greene-Lewis told Reeves.

Need a list of the tax benefits you can claim as a first-time homebuyer? Check out TurboTax for more tips and resources.

Other Indicators of Financial Stability

Depending on your financial situation, homeownership may not be feasible - or desirable - for you at this point in your life.

Maybe you prefer to rent, since you anticipate moving for your career. Maybe you’re focused on paying down student debt, so you can use your disposable income for other interests and savings goals.

Whatever the reason, homeownership is no longer the path to financial stability it once was for the average American.

Looking for ways to make yourself more secure in the long term? Here are other financial areas you can focus on:

  • Increasing your monthly savings. Most Americans struggle with saving - even though they know how important it is to do so. Instead of saving for a down payment, it may be worth increasing the amount of money you sock away in a high-yield savings account, so you have more flexibility in the future.
  • Investing in emergency savings. Beyond a generous savings account, you should plan on having at least three to six months of expenses set aside for emergencies, advises Arielle O’Shea at NerdWallet. “Conventional advice says that emergency money should be stored in a regular savings account, where you’ll earn...1% interest,” writes O’Shea.
  • Lowering your debt-to-income ratio. Whether it’s student loan payments or credit card debt, owing other people money is the quickest ticket to financial instability. Learn how to manage your debt-to-income ratio at StudentLoanHero.com.

Buying a home in the current competitive market is a highly personal decision - and it’ll depend on your financial situation, too.

Even though homeownership can help you create both wealth and equity, don’t forget there are other paths to financial stability that are just as important to your long-term well being. Be sure to talk your decision over with family members and your partner to determine the best path for you.

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