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Buy a Home and Pay Off Your School Loans

I was recently talking with one of our clients that bought a home with us three years ago. He said he just refinanced his home loan and paid off all his school loans. I asked him what lead to that decision. He said, “Well at the end of the year, you mailed us a list of homes that sold in our neighborhood and I couldn’t believe that our home had risen $40,000 in value since we bought it. I spoke with our loan officer and found that it made sense to refinance our home, draw out $25,000 and just pay off those student loans. The interest rate on those loans was 5.25% and our home loan has an interest rate of only 3%. On top of that, we decided to switch to a 15 year loan because the monthly payment was only slightly more than our monthly payments were with both the student loans and the original 30 year mortgage. Our loan officer ran the numbers for us and we will be saving tens of thousands of dollars over the next 15 years on the life of this loan!”

After we hung up, this conversation got me thinking. If they had decided to stay in a rental home or apartment and not buy a home, there’s no way this would have happened. Their rent would have continued to increase during that time and they wouldn’t have had options like this for paying down debt. It’s like someone just threw them a lifeline to help them financially. This is why homeownership in America is such a great investment and here are five primary ways being a homeowner can help you build wealth:

Homeownership can help create a forced savings.

Most people aren’t very good at putting money aside each month, but every financial expert would agree that having a savings cushion is essential for financial freedom. For homeowners, a monthly mortgage payment can act as a forced savings. As you pay down your principal, you build equity, which helps to increase your net worth.

Homes usually appreciate in value.

While there’s no guarantee that the home you buy will appreciate, there’s a pretty good chance. According to the Federal Housing Finance Agency’s House Price Index, home values have appreciated an average of 3.6% each year since 1991. For instance, if you purchased a home for $100,000 in 1991, your home could be worth around $250,000 today. In addition to the amount you’d have paid off on your mortgage during that time, this appreciation in value builds even more equity, therefore increasing your net worth.

A home is a tax shelter.

When you earn a profit from a property or investment (say, the stock market), you normally have to pay capital gains tax. But if you make a profit when selling your home, that profit can’t be taxed (with some limitations), which keeps more money in your pocket. Owning a home also comes with other tax benefits, such as deductions on mortgage interest, mortgage discount points, mortgage insurance, and property taxes. These reduce your taxable income and can help you keep more of your hard-earned money.

You can have a fixed, stable housing payment.

Renters are susceptible to fluctuating rental prices, which have historically gone up each year. Mortgages, on the other hand, can be fixed, which provides a stable housing payment that won’t fluctuate over the life of your loan. This will allow you to keep your cost of living down and put more of your money toward savings, investments, or other avenues that can help you build wealth.

Homeowners have a greater net worth. 

According to the Federal Reserve’s latest Survey of Consumer Finances, homeowners in the U.S. had a median net worth of $255,000, while renters had a net worth of just $6,300. That’s a difference of 40x between the two groups. This comparison clearly shows the power of homeownership for building wealth.

If you want to gain financial freedom, homeownership is a no-brainer. Buying a home is one of the smartest things you can do to help you build wealth for the long-term. As my past client said near the end of our phone call, “Maybe I should have bought two homes!”

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