Many people view homeownership as a key component in building wealth for retirement. Most experts believe there is a direct correlation between owning a home and building a greater net worth than those who rent. However, there are always two sides to a story. This is no different. Not everyone agrees that there is a direct correlation between owning a home and building wealth. Let’s look at both sides of the argument.Verify your mortgage eligibility (May 26th, 2022)
The Case for Building Wealth by Owning your Home
Let’s start with the more commonly held belief that there is, in fact, a direct link between these two. Particularly with mortgage interest rates as low as they are right now, there’s a lot to be said for buying a home to help build a nest egg.
For many people, buying a home means investing in an asset that will increase in value over time. As your home appreciates, your mortgage payments remain constant. This is assuming you have a fixed-rate mortgage, which is always preferred for long-term investment. When the time comes to sell, you make a profit. Or better yet, you fully pay off your mortgage and ultimately get to a point where you can then put that extra money toward other investments.
Beyond simply waiting for your home to appreciate in overall value, you are also building equity as you pay down the mortgage balance. This idea of “forced savings” creates a safety net since you can borrow against that equity for a variety of reasons—from financing an addition that will further increase your home’s value to paying for emergencies that life may throw at you over the years. This is something renters do not have since their monthly housing expense is going to someone else’s pocket.Verify your mortgage eligibility (May 26th, 2022)
The Case for Renting and Investing Instead
The other side of that argument looks at building wealth by paying less for housing as a renter and then investing the difference.
The More Affordable Option
After all, renters generally choose that option because it is more affordable than buying. There are other reasons, too: flexibility in moving, less stress, more time for travel. But ultimately the money factor is a big one. Additionally, renters do not have to pay for repairs, home upgrades, property taxes, and so on. While many will say a lot of those expenses are essentially built into the rent, the fact remains that if the air conditioning unit dies, a renter does not have to suddenly come up with the cash to replace it. By spending less on housing, tenants have more discretionary income for other things. If those “other things” include investing, renters can close the wealth gap with homeowners.
Better Returns on Investment
The other component of the pro-renting argument is that investing in the stock market is financially more beneficial than having it locked into a mortgage. Historically-speaking, we would all come out ahead by investing rather than waiting for our homes to appreciate. That is assuming, of course, that you do invest that extra money instead of spending it on other things. It’s also assuming you have extra funds available to invest. And this is where many skeptics take issue that renting and wealth-building belong in the same conversation. Even though rent is generally less than a comparable mortgage payment, that doesn’t always mean rent isn’t also budget-stretching.Verify your mortgage eligibility (May 26th, 2022)
Which is Better?
The bottom line is that everyone must make decisions for themselves, based on all applicable factors. The monthly budget isn’t the only reason some people decide to rent. And long-term property appreciation isn’t the only reason other people buy. In terms of which is best for building a bigger nest egg, ownership’s “forced savings” aspect is hard to beat. Not because it’s the greatest return on investment, but because it’s a lot easier for most people to manage. Only about half of Americans invest in the stock market, partly because of the 2008 crash. Many may still feel intimidated or unsure about how to successfully invest in the market.
Perhaps the best take-away from this comparison is that renters can take heart in knowing it’s possible to accumulate the needed funds for retirement. And owners can better plan for their futures by combining their home equity with additional investments to capitalize on having multiple revenue channels. There’s no such thing as a sure thing. Markets can crash, values can fluctuate. But with good planning–on either side of this argument–you can accumulate the wealth you need to retire.Show me today's rates (May 26th, 2022)