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Creating “Stealth Wealth”

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Thought bubble with reminder to do financial planning

Creating a sound financial strategy, especially early in your adult life, is one of the keys to ensuring your financial security and the well-being of your family, not to mention a safe retirement. A smart financial plan lays the foundation for personal savings growth and enables you to put the power of compounding interest to work for you. Given the recent trends in the housing market–higher home appreciation, record low interest rates and an ever-tightening apartment rental market, it’s clear that buying a home is still one of the most powerful wealth-building tools around and the financial benefits appear to be getting better and better when compared to renting.

Homeownership allows you to build “stealth wealth”, or wealth that is created from an asset whose value increases gradually over time by providing significant (but almost imperceptible) financial benefits along the way. For example, when you make a monthly mortgage payment, a portion of each payment is applied to the remaining balance. By forcing you to pay down the principal balance of your mortgage each month, you increase the difference between what you paid for your house and what you can sell it for—or, in other words, you build equity in your home. Voila! Suddenly your house payment has been transformed from a monthly bill into a monthly investment, an investment whose return increases each month despite the fact that most of us don’t track that “return” in the same way that we track the value of our stocks or mutual funds. Nevertheless, you are methodically accumulating “stealth wealth” each month when you own a home.

Another advantage of homeownership that can add to your “stealth wealth” is the mortgage interest tax deduction. As it turns out, Uncle Sam has encouraged homeownership, having allowed taxpayers to deduct their mortgage interest for over 100 years. Since interest payments often comprise the largest portion of your monthly house payment, the financial windfall can be significant. To better understand how the mortgage interest tax deduction applies to your specific situation, we advise that you consult a tax adviser. However, while you’re at it, make sure and have your adviser explain the other real estate expenses that are tax deductible, such as your real estate property taxes and the closing costs from your mortgage. Combined, these tax deductions can increase your tax refund substantially and provide you with an additional layer of “stealth wealth”.

While we’re on the subject of mortgage interest, now is an incredibly good time to buy a house because interest rates are at historically low levels. Securing a lower interest rate means your house payment will be lower, which is certainly desirable, but lower interest rates also enable you to afford a more expensive house because you can qualify for a larger loan. Even a ½% lower interest rate on your mortgage can make a big difference in what you can afford, so buying a house now makes much more financial sense than waiting to buy a home in a few years.

If there’s one lesson that was learned from the 2008 recession it’s that no investment is a “sure thing”, even homeownership. When the real estate bubble burst in 2008, property values dropped sharply and caused a great deal of economic hardship, particularly for those homeowners who had taken out risky subprime loans and were highly leveraged. However, the U.S. economy has once again proven to be quite resilient. The Federal Reserve has kept interest rates low, subprime lending has largely been eliminated, and the residential real estate market has strengthened considerably. As a result, property values in many metropolitan areas have fully recovered from the effects of the 2008 recession. Homeownership continues to be a wise investment when compared to renting.

So how many of the financial benefits that we’ve just described apply to renting an apartment? The answer is none. Making matters more difficult for renters is that apartment rents are increasing in many parts of the country, according to REIS, Inc. Renting an apartment may reduce some of your living expenses relative to owning a home, such as home maintenance expenses, but writing a rent check is like throwing your money away—you’ll never get any part of it back. You’ll never build equity in your apartment, you’ll never have the option of refinancing to make home improvements or pay other bills, and you won’t be able to use the proceeds from renting your apartment to help fund your children’s college education or your retirement. And you won’t realize any of the annual tax benefits along the way. The financial advantages to homeownership are overwhelming, especially at this moment in time.

Perhaps most importantly, however, homeownership provides us with a sense of place and identity that renting an apartment can never come close to equaling. For many of us, owning a home is an important part of achieving the American Dream and instills in us a unique sense of pride and ownership. Indeed, the longer we live in our home the more our home becomes part of our family identity. In our later years, many of us choose to age gracefully in the place where we’ve raised our family and loved our grandchildren. The financial advantages of homeownership are certainly substantial when compared to renting, but there are other advantages to homeownership that are much more rewarding.

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