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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 what makes home ownership a good investment?

To begin with, homes increase in value, creating perhaps the most common source of capital gains. The demand for housing has never been greater—especially with the rapid population growth of the last half-century—and that demand has fueled consistent growth in real estate prices. Appreciation rates have been very attractive over many of the last few years, depending on location and the state of the economy. A home that was built for $15,000 in the 1960s can easily be worth more than $100,000 today. However, one should be wary that past growth is no guarantee of future growth.

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

Your wealth also 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. Your accumulated principal plus the appreciated value of the property is commonly referred to as your home equity, or the amount you actually own (as opposed to what you owe the bank, credit union, or mortgage company).

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).

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.