According to a Federal Reserve report on Consumer Finances, homeowners’ net worth is 36 times greater than that of renters. Wow! That is an incredible fact.
Building on that study, the National Association of REALTORS® believes that by the end of 2015, the net worth factor will grow to 41 times greater.
There can be several factors that contribute to this disparity but an important one is the forced savings plan that happens with an amortized mortgage. When you are paying a mortgage, a portion of the mortgage payment goes to reduce the principal balance (in other words to pay off the mortgage). When you reduce the principal balance of the mortgage you increase your equity in your Kalamazoo area home.
Appreciation is also a major contributor to homeowners’ equity. Homes, in most areas, have consistently increased in value over the long term and during the past four years have experienced solid growth. Many economists expect home prices to increase in the next five years. There
have certainly been periods of time when home prices have not increased over the short term, just like there are short term losses in the stock market, BUT over the long term, house values have been on a nearly steady rise. That is great for the home owner.
Let’s look at a scenario where a qualified Kalamazoo home buyer considers three different options to see what investment brings the best return over a five year term. The 3 choices we will consider are to purchase a certificate of deposit, invest in the stock market or buy a home. We are making the following assumptions: a $250,000 home with an $8,750 down payment with a 4.5% mortgage for 30 years and 3% annual appreciation; CD rate at 2% and a 5% return in the stock market. The mortgage rate right now (October 2015) is actually even lower than the 4.5%.
The $8,750 would grow to $9,661 in the certificate of deposit, the investment of $8750 would grow to $11,167 in the stock market and the $8750 would grow to $69,900 in equity with a home purchase. That is over a six times growth in the same period of time due to the amortization of the loan and the appreciation. Because we don’t want to just believe hype — please note that in the past 3 year period (and remember that 2012 was one of the toughest in history) the average appreciation in house prices in the greater Kalamazoo market was 6% for the 3 years, so a 2% annual appreciation is more accurate for the most recent Kalamazoo market. That means the equity using the 2% annual appreciation would be $59,540 which is still a sizable improvement over the other investment options.
We have provided a simple calculator for comparing how investing in a home compares to investing in the stock market or a CD so that you can input information from your own life situation. Click here to check out Your Best Investment Calculator to compare best investment vehicles in your price range.
Many renters hesitate to purchase because they don’t want to do home maintenance or grass mowing or snow shoveling. It is really convenient to just live in a place and not feel responsible for upkeep. That same option is available in a condo — and yet you are able to build wealth with your home purchase. The condo at 8857 Silver Oak is a fabulous example of a condo home that has 3 bedrooms, 3 bath and 2523 square feet and the care free living that a condo affords.