Why Invest in a Home?

There are lots of reasons to buy a home: the pride of ownership, the freedom of owning your own lodging, and the comfort of moving out of a cramped apartment, to name but a few. But is home ownership a good investment?

To begin with, homes have historically increased in value, creating perhaps the most common source of capital gains. According to the U.S. Census Bureau, median home values adjusted for inflation nearly quadrupled from 1940 through 2000. The demand for housing has never been greater, especially with the rapid population growth of the last half-century. That demand had fueled uninterrupted growth in real estate prices until mid-2006. Then, past easy lending and other factors created what has become known as the housing or real-estate "bubble."

Your wealth increases each time you make a monthly mortgage payment.

The extent of a fall in prices is dependent upon the region, the state of the national as well as local economy, and the sector of the market one looks at (i.e., low-end, middle, or high-end). In any environment, people should be wary that past growth is no guarantee of future growth. Yet it remains true that a home built for $15,000 in the 1960s can easily be worth more than $100,000 today. Since houses are built on land, it may still be wise to remember the old saying, "They're not making any more of it." Everyone needs a place to live, so that fact bodes well for future real estate price appreciation, even if the go-go days of the 1990s never return.

Moreover, even in a down market, your wealth increases each time you make a monthly mortgage payment. Although the interest belongs to the institution that made the loan, the principal portion of the payment belongs to you, and it accumulates—like a savings account—over time. The current market value of the property, minus what you owe on the property to the bank, credit union, or mortgage company, is commonly referred to as your home equity. In other words, it's the portion of the property you actually own, free and clear.

But even what you owe on a house has its advantages. The biggest advantage is the mortgage-interest deduction. Basically, you can deduct the interest paid on any loan secured by your home (or second home). These loans can be the mortgage to purchase the house, or a loan or line of credit borrowed against your home equity. You can deduct up to $1 million in interest, or $500,000 if you're married and file separately. The interest deduction limit for home equity loans is $100,000 ($50,000 if you are married and file separately).

See IRS Publication 936 for more information.

You can also deduct the property taxes you pay. And when your family decides to sell the house, the first $500,000 in capital gains ($250,000 for single taxpayers) is yours tax-free. You can use this exclusion only once every two years, however.

The purchase of a potentially appreciable asset such as a stock, a bond, a property, or a unit of production. The purchase provides funds for the growth of businesses and governments.

The profit from the sale of an investment asset. The opposite of a capital gain is a capital loss.

A rise in the general price level of goods and services; inflation is the opposite of deflation. The Consumer Price Index and the Producer Price Index are the most common measures of inflation. As a probable result of inflation, labor asks for higher wages to buy more, prices rise to meet those wages, and inflation becomes a cycle.

The desire for a product or service. As a part of the law of supply and demand, demand is the need, and supply is the answer to the need. The law usually determines prices in markets that are unregulated.

Gains in value. In business, growth is measured by the expansion of assets and sales. In securities, it refers to the increase in market prices.

Land and the physical property attached to it, such as houses, buildings, factories, and trees. Where applicable by law, real estate may include gas and oil leases.

The giving of money to a borrower, who promises to pay the loan back at a later date, generally with interest.

A group of closely related industries.

A place where buyers and sellers make transactions. Sometimes the term also refers to the specific demand for an investment, such as in the stock market or the commodity market.

An increase in the value of any asset. The opposite of appreciation is depreciation.

A bear market. The state of declining stock prices. Down markets are often good markets for buyers, as shareholders seek to rid themselves of depreciating stocks.

A loan to buy real estate property, usually secured by the real estate property itself.

A charge for using another's money. Interest is usually stated as a percentage of the amount borrowed and can be charged in a variety of ways, such as accrual, compounding, or simple interest.

Money that has been borrowed from a creditor (lender) by a debtor and that must be repaid. Loans may also be referred to as liabilities.

1. The amount borrowed, or the part of the amount borrowed that remains unpaid (not including future interest). 2. The part of a monthly payment that reduces the outstanding balance of a mortgage or other loan. 3. The original investment amount of a security. 4. In banking terms, principal is the original deposit or loan on which interest is earned or paid.

A business agreement in which a bank, credit union, or other financial institution agrees to hold and pay interest on money deposited. The customer may withdraw some or all of the money, but not by writing a share draft or check.

The current sale price of a security or other asset.

A business, with a state or federal government charter, that provides services such as paying interest on deposits, issuing and collecting checks, and making loans, especially to businesses. Shareholders receive part of a bank's profit as a return on their investment in the bank, represented by the stock that they've purchased.

A not-for-profit financial cooperative owned by its members. One is eligible to join a particular credit union if he or she belongs to the field of membership defined in its charter. All members have the right to democratically elect a board of directors. The board gives the credit union's management and staff general instructions. Historically, credit unions encourage thrift among members and provide them with credit at a low rate.

The difference between the value of your home and what you owe on it.

A reduction of taxable income equal to the interest paid on a home loan.

Backed by collateral in the form of an asset or an income stream.

1. A legal agreement in which a borrower receives something of value now by promising to pay the lender for it later. When the item of value is money, the agreement is called a loan. When the item of value is a product, the purchaser buys it 'on credit.' 2. Belief in the trustworthiness of a person or entity that borrows.

Amounts subtracted or withheld from one's gross income. Some deductions, such as taxes, are required by law. Others are elective. For example, you might have the option of putting part of your earnings aside in a pension plan, individual retirement account (IRA), or other savings account. You also might instruct a financial institution to automatically regularly deduct a loan payment so that you don't have to remember to write a check each month. Deductions are also called payroll deductions.

The agency of the federal government that is responsible for collecting federal income and other taxes and enforcing the tax laws of the US government.

A payment to federal, state, and/or local governments based on the sales price of a product, on worker income, or on other property and activities.

Why Invest in a Home?

Home Ownership