Are rates going up or are they going down? The truth is, no one can be certain which direction they’re headed. While many investors and rate-watchers believe they can time the market to get the lowest interest rate possible, dart throwing with a blindfold typically proves just as accurate.
So, just like investing in the stock market, prospective homebuyers should think less about timing the market (for low rates) and think more about their time in the market, because homes have historically shown that they appreciate over time. Generally, homes appreciate 3% to 5% annually.* Even when prices faltered as they did during the Great Recessions, the vast majority of those same homes have now recouped or exceeded their previous value.
So, while low rates are great, when you can get them, if you buy not for rate reasons, but for the right reasons, you’ll likely come out ahead.
Here are 10 right reasons listed below:
1. Potential Tax benefits†
As a homeowner, if you itemize, you’ve been able to deduct both mortgage interest and property taxes from your annual income taxes to a certain limit. New tax laws, however, have bundled these deductions or limited their amount, so it’s more important than ever to consult your tax advisor to learn how these new tax laws affect your personal situation.
But the bottom line, the government is still subsidizing your purchase.
2. Price appreciation
According to the U.S. Bureau of Labor Statistics, prices for housing were 50.88% higher in 2018 versus 2000.* In other words, housing costing $100,000 in the year 2000 would cost $150,880.53 in 2018 for an equivalent purchase.
3. Inflation hedge
Housing costs and rents tend to outpace the rate of inflation. Between 2000 and 2018, housing experienced an average inflation rate of 2.31% per year. This compares with an overall inflation rate of 2.07% during this same period, according to the U.S. Bureau of Labor Statistics.**
4. Credit builder
Payment history on your debts makes up the largest portion (35 percent) of your FICO score, which financial institutions use to determine the amount, rate and terms for loaning you money. If you continue to make your full mortgage payment on time, your FICO should go up. As you reduce your mortgage loan balance, your FICO should incrementally rise as well, as 30 percent of your FICO is tied to how much you owe. Conversely, late payments may ding your FICO score. For example, a mortgage payment 30-days-past due could drop your score of 720 to between 630 and 650. So, pay up and on time and your FICO may increase, making it possible to finance future purchases at favorable rates.
5. Equity builder
Equity is the difference between your home’s value and what you owe mortgage lender. So, if you put down 20 percent and financed the rest through your lender, your starting equity would be 20 percent. With each loan payment, your home equity would grow and give you more borrowing and purchasing power, as restated below.
6. Borrowing power
More home equity means the chance to borrow more money with a second mortgage in the form of a home equity loan or a home equity line of credit. These loans provide money for funding home improvements, paying medical bills, funding a child’s education or buying consumer goods like a new car, boat or RV.
7. Move-up power
Homeowners can apply some or all their increased equity toward the purchase of a larger or more expensive home. Interestingly, home equity also was used as a source of capital to start 284,618 businesses—7.3% of all businesses in the U.S.—according to a 2017 survey conducted by the U.S. Census Bureau.
8. King/Queen of the Castle
As long as you pay your monthly mortgage, you’ll never face a landlord’s eviction notice. And if you have a fixed-rate mortgage, you won’t have to live in fear that your monthly payment will go up. And if you want to blast the volume on your music system, there won’t be a landlord calling you to turn it down. You rule.
9. Forced savings plan
By paying your mortgage every month, you’ve embarked on a forced savings plan. If you want to supercharge that savings plan, simply add an amount that exceeds your combined monthly principal, interest, taxes and insurance payment. When your mortgage is paid off, you own an asset that you can sell, swap or sit on for further appreciation.
10. Capital gains†
How do you spell relief? One item the new tax law left intact was the capital gains exemption. You’re exempt from paying any capital gains tax on the first $250,000 of gain if you’re single, and $500,000 of gain if you’re married, provided you have lived in your residence two of the last five years. You can take advantage of this exemption every two years.
Put these advantages to work
Something as important and financially useful as owning a home is also worth protecting. Therefore, set aside a rainy-day fund to maintain your home and make sure your home insurance policy is sufficient to cover both damage to your property and your liability for any injuries and property damage you or members of your family cause to other people.
Lastly, treat your home as a prized asset, not as a personal piggy-bank to be raided whenever you feel the urge. It is a powerful financial instrument that should be used with great precision to help you save on taxes, hedge against inflation, enhance savings for retirement, strengthen your credit, build equity, buy more house, create more financial flexibility and command more borrowing power in the event you need it or want to leverage it to create additional wealth.
Don’t buy a home for rate reasons alone. But it for all the right reasons, too.
*If the economy is strong, a home's value generally increases 3% to 4% every year, driven by inflation and natural population growth. From 2011 to 2016, the national housing market was recovering from the bubble at a slightly higher speed: 6.3% a year, on average. From: https://www.realtor.com/news/trends/which-kinds-of-home-appreciate-fastest/
**According to the U.S. Bureau of Labor Statistics, prices for housing were 50.88% higher in 2018 versus 2000. https://www.officialdata.org/Housing/price-inflation
†Always consult your tax advisor or accountant for the latest tax information that could possibly affect your financial situation.