Rent VS Buy
As an example, let’s look again at that $200,000 home. Unlike your rental unit, your home usually appreciates over time. Instead of assuming average growth, we assume a slightly slower 4.0% rate of growth.* At this pace, in the third year of ownership, your home has appreciated to a modest $216,320. After ten years, your $200,000 home will be worth $284,862. Not only do you earn a rate of return on your original purchase price, you also get a return on any subsequent appreciation. *Average annual price appreciation in the last 40 years was 5%.
Homeownership Builds Wealth for Households
The Federal Reserve Board estimates that homeowners’ net worth has ranged between 31 and 46 times more than that of renters in the years 1998 to 2013. In 2013, the median net worth for homeowners was $195,400 compared to $5,400 for renters. Even after house price declines, several years ago, narrowed the differential between homeowners and renters, typical homeowners still had more than 34 times greater net worth than typical renters. How do you build up your net worth? As a homeowner, you build wealth in two ways: through paying down the principle on your mortgage and through those “appreciating returns” on your home. We’ve already seen how your $200,000 home could be worth $284,662 in ten years. In addition, you are paying down the principal on your mortgage. Remember that $200,000 you borrowed at 5 percent over 30 years – that debt amount is decreasing every month and every year as you make payments.