Buying a home is, for many, a symbolic act; it shows that you’re fiscally responsible enough to own such an important and massive asset. On top of that, it’s usually considered a part of the American dream, or a milestone on the journey to success in Western society. Every year, millions of people save up money for a down payment and begin the homebuying process just to achieve this level of success.
But more than that, it actually has the potential to improve your financial standing-and your chances of building wealth for the future. Rather than serving as a central goal, it can and should stand as a precursor to your longer-term financial goals. But how exactly does it do this?
How Homebuying Improves Your Finances
These are just some of the most important ways buying a home can improve your financial standing:
1. Credit score improvements. You’ll need a decent credit score if you want to buy a home-at least for the most part, as there are special loans available for people with low credit. Still, unless your credit is perfect, there’s always room to improve. Buying a home gives you the opportunity to build your credit score, so long as you make your payments on time and consistently. That higher credit score is going to make it easier to secure loans and credit in the future, and get lower rates. This is of special importance if you plan on buying another, bigger house in the future; even a fraction of a percent savings on your mortgage interest rate can save you tens of thousands of dollars.
2. Home equity. One of the biggest and most obvious financial advantages of buying a home is your ability to build home equity over time, rather than giving your money to someone else. When you rent, your money goes directly to the homeowner, but when you buy a house, much of your money is put toward a permanent asset that you officially own; therefore, you’ll see a much higher return on your monthly investment with an owned house. When it comes time to sell the house, you’ll make much of that money back, giving you a springboard to your next major financial goal.
3. Budget restrictions. Your monthly mortgage payment is going to be relatively unchanging over the years; as long as you’ve got a fixed rate mortgage (as is typically advised), your principal and interest payments will remain the same. Your property taxes and home insurance rates may increase slightly from year to year, but otherwise, you’ll be paying a similar amount. This fixed rate will make it easier for you to plan your monthly budget, and can assist in helping you create a long-term financial plan.
4. Buying experience. Even the process of buying a house can be significantly beneficial to you. Learning what to look for, understanding the buying process, and critically thinking to make the wisest investment are all experiences that equip you with wisdom you can apply to future transactions. You’ll be able to think clearer about the value of the assets you’re considering, and you’ll end up seeing higher returns on your investments.
5. Rental income. Owning a home also gives you the opportunity to establish a side stream of income. If you have an extra room, for example, you can rent it for a few hundred dollars a month to someone who needs the space. Though you’ll have to make some sacrifices (such as increased housework and the burden of living with someone else), you’ll offset your monthly mortgage payments, and stand to make even more money.
The Importance of Diversification
It’s true that buying a home can improve your financial standing and your future, but it isn’t the only action or habit that you’ll need to build wealth. If you want to succeed, you need to diversify your strategies and investments, drawing income from multiple sources if possible, putting money in many kinds of different assets, and of course, learning as much as you can about the world of financial management.