We recently read an article titled “Homeownership Doesn’t Build Wealth” that asserted that renting a home is a superior way to build wealth than buying a home. The article relied on an academic study that concluded that given fluctuations in property values, renting a home and investing the money you save in the stock market or other investment vehicle provides a superior financial return than owning a home and selling it in the future. While the article and academic study were comprehensive and insightful, we believe they miss the mark for several reasons. In fact, there are multiple ways homeownership is superior to renting for building wealth, even if you never sell your home.
First, the study focused on price appreciation as the only way homeowners derive value from their homes but that is not always the case. People who buy and hold their home and pay off their mortgages can generate significant value from their property even if they never sell. An increase in property value is certainly welcomed by homeowners, but eliminating your monthly mortgage payment has its own rewards.
Paying off your mortgage leaves you less vulnerable to property value fluctuations and tax code changes, which is highly relevant in the current political environment. The mortgage tax deduction is certainly less important if you own your home free and clear! Paying off your mortgage also significantly eases your financial burden. With many people spending 50% or more of their monthly net income on housing expense, eliminating your mortgage payment greatly enhances your financial position as compared to renting.
Although homeowners are required to continue to pay property tax and insurance, removing your mortgage payment can lower your total monthly housing expense by upwards of 80%. Overpaying, or accelerating, your mortgage enables you to pay it off faster than scheduled and eliminate your monthly payment sooner. Unfortunately, you can never eliminate your rent payment (unless you buy a home, of course) and rent decreases are highly uncommon in today’s tight market. By providing the ability to pay off your mortgage and substantially lower your monthly housing expense, homeownership is financially superior to renting in the long run and an important component of sound financial planning.
The authors of the study also failed to consider the value of homeownership as a tool for retirement planning. For example, senior citizens all across the country are getting squeezed by rent increases. Many senior citizens live on fixed incomes and have limited financial resources, making them especially vulnerable to rent hikes. On the other hand, a senior citizen who owns their home outright is in a much better position financially, regardless of the value of their property. By making retirees immune to rent increases, homeownership provides significant value beyond what a property is worth. In the best case, property appreciation combined with eliminating your monthly mortgage payment provides wealth creation without the risk of market corrections.
We concede that paying off your mortgage is challenging — 30 years is a long time — but there are steps homeowners can take to accelerate the process. Overpaying your monthly mortgage payment, even by a small amount, can have a big impact.
For example, adding an extra $40 to the monthly payment for a $100,000, 30 year fixed rate loan with a 4% interest rate, eliminates over four years of monthly mortgage payments and saves you almost $24,000 in payments. It is important to highlight that overpaying your mortgage is absolutely free and you can change the overpayment amount at any time during the mortgage term.
After your mortgage is paid off early — 48 months early in this case — you can invest the money you were paying the lender into the stock market or other investment vehicles. Continuing the example above, investing the monthly payment you would have made to the lender at a 4.000% after tax rate of return yields a future value of approximately $34,000.
So in this scenario, at the end of 30 years the homeowner owns the home free and clear, has no monthly mortgage payment and holds an investment portfolio valued at $34,000. The homeowner is on sound financial footing regardless of how the value of their home has changed and any property value appreciation is upside.
In closing, while we respect methodology of the study cited in the article, the analysis overlooks that homeownership is a different type of asset class than stocks or bonds. Homes provide owners with tremendous utility such as shelter and enhanced quality of life that is not afforded by intangible investments. Additionally, homeownership provides significant non-financial benefits that can exceed the monetary value created by flipping an asset that has appreciated in price. In short, homeownership not only builds wealth but peace of mind. And that is priceless.