The majority of American households own a primary residence, but did you know that the average homeowner has a greater net worth than their renter counterparts?
Equity in a home (the difference between what is owed on the mortgage and what the home may sell for in today’s market) is one of the biggest drivers of net worth. Below is an example of how home ownership can impact an individual’s net worth over 20 years. The below assumes the renter and the homeowner both stay in the same property for 20 years. Rent increases each year for the renter (the average increase since 2000 according to the US Census) and only principal and interest on the mortgage is taken into consideration.
The median sales price of a home or condo in Seattle in August of 2017 is $669,000 according to NWMLS and we are using this as our purchase example. We assume a 20% down payment, 30-year fixed rate mortgage at 4.25%, and appreciation of 5.0% annually (which is conservative for our area). Median rent is currently $2,210 per month according to the Rent Jungle.com and although the average rent has increased 9.9% per year since 2011, we will assume a 5% increase per year.
| Beginning Equity | $0 | Beginning Equity | $133,800* | |
| Monthly Rent Year 1 | $2,210 | Monthly Payment Year 1 | $2,632.86 | |
| Monthly Rent Year 5 | $2,686 | Monthly Payment Year 5 | $2,632.86 | |
| Monthly Rent Year 10 | $3,428 | Monthly Payment Year 10 | $2,632.86 | |
| Monthly Rent Year 15 | $4,376 | Monthly Payment Year 15 | $2,632.86 | |
| Monthly Rent Year 20 | $5,585 | Monthly Payment Year 20 | $2,632.86 | |
| Ending Equity | $0 | Ending Equity | $1,557,735 | |
| Amount Spent | $876,909 | Amount Spent | $631,886.95 |
*Even if you don’t have 20% to put down, first time home buyers can buy a home with a very small down payment and pay a little more each month in mortgage insurance while equity builds.
Clearly, homeownership can be a fantastic way to build wealth! Of course, there are additional pros and cons to either renting or purchasing a home and all should be considered before jumping into a home purchase. Appreciation rates and rent rates change from area to area and even neighborhood to neighborhood! I would be happy to show you the possibilities in our area.
