Everyone knows that buying a house is one of the biggest financial decisions most people will ever make. Although it can be fraught with pitfalls at every turn, homeownership’s advantages often outweigh the risks.
Taking on a mortgage comes with a lot of responsibility, but owning a property can help someone accumulate wealth in a number of ways, such as tax benefits and sustained home value growth.
Despite high house prices and interest rates, owning a property is a sensible way to help you build wealth quicker than you think — GOBankingRates shares how.
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Leveraging Your Mortgage
Using your borrowed debt — your mortgage — is a leverage to increase your net worth and increase a return on investment. By putting down a small portion of the house cost and borrowing the rest, the homeowner is using other people’s money to build wealth as the whole asset appreciates, not just the part they paid for with their own money.
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Home Appreciation
You can’t do it fast, but one of the biggest benefits of owning a home is the opportunity to build wealth over time through increasing home equity. A home can appreciate or depreciate over time, depending on many factors — location, supply and demand and economic conditions — but typically, real estate tends to increase in worth.
Tax Benefits
Mortgage interest and property taxes can be deducted from your taxable income, lowering your overall tax burden and offsetting the expenses that come with owning a house. According to the IRS, the costs a homeowner can deduct are state and local real estate taxes (subject to the $10,000 limit) and home mortgage interest, within the allowed limits.
Hedge Against Inflation
A fixed-rate mortgage keeps your monthly payments constant over time, even as inflation raises other living costs. So, if you managed to obtain a mortgage during a period of low interest rates, it will remain constant and becomes more affordable in real terms. As inflation rises, so do property and rental prices, enhancing the value of your investment. If you have a mortgage, you are protected against growing costs, which can increase your wealth-building potential over time.
Mortgage Payments vs Rent
Owning can be less expensive than renting in many markets. According to a recent Zillow Home Loans study, drops in mortgage rates and rises in inventory have resulted in 22 of the 50 largest metros in the U.S. having a lower average monthly mortgage payment than for rent. Using the difference in what you’re paying in mortgage versus what you’re paying in rent can be invested in wealth-building initiatives.
Potential Rental Income
Investing in rental properties is a great way to build wealth and so is becoming a landlord and collecting a passive income from someone renting an extra room or basement apartment in your home. When inflation rises, your potential for building wealth increases more, allowing you to offset mortgage payments with a portion of what you’re getting from your property.
Generational Wealth
One of the most significant benefits of homeownership is the potential to accumulate wealth that may be bequeathed through generations. Passing down a paid-off property to your descendants can help break the cycle of poverty by providing possibilities for “education, entrepreneurship and financial security,” according to Forbes.
Investment Opportunities
Simply saving money doesn’t increase your wealth, but all of these strategies can help you free up money to invest. Any additional money you can save allows you to have cash set aside for emergencies or an unexpected expense. And saved money can be used to invest in equities, fund retirement accounts or seek other real estate opportunities, all of which have the potential to increase wealth more quickly than early mortgage repayment.
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This article originally appeared on GOBankingRates.com: Why Having a Mortgage Might Actually Help You Build Wealth Faster
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