Is Buying a Home a Path to Financial Freedom? (Is the Answer Changing?)

For most U.S. deed holders, a home is at the core of their retirement wealth. So, does that make buying a home a path to financial independence?

It certainly can be, although the calculus is changing.

Thumbs on the Scale: Mortgage Interest Rates

The pandemic set off a flurry of Federal Reserve activity that’s still unsettled. This makes financial rewards for buying versus not buying take longer to obtain than before the pandemic.

Historically, buyers were advised to retain their homes for 5 to 7 years to begin seeing investment returns. However, a buyer in late 2023 may need to keep their home for 13 to 15 years or more in certain cities to merely break even on their investment.

Why? Home values have shot up — which seems good for owners. But interest rates are high. Younger homebuyers have forked out massive closing costs just to get on the ladder.

In other metro areas, too, the time until the break-even point is surprisingly long. Does it change the answer to whether home buying supports financial freedom? Or are the basic principles of equity-building still in place? Let’s see.

Still Intact: The Case for Homeownership as Financial Freedom

Homeownership has its perks. This hasn’t changed. To a substantial degree, it can lock in regular, predictable housing costs. In an inflation-riddled economy, this may be more crucial than ever for financial success.

Buying doesn’t set monthly costs in stone, of course. Property taxes, insurance, association fees, and costs for repairs and maintenance can all go up. Then again, certain rental scenarios can change absolutely — and on a dime.

A key financial factor for the ordinary deed holder is equity-building. Most homeowners aren’t too eager to move if it’s not necessary. As they stay in their homes, they keep accumulating property value. Many homeowners renovate their homes, boosting the worth of their properties.

In short, what do buyers get by paying off a fixed-rate loan while holding a deed? A level of control over both the property’s value, and its costs. The common, fixed-rate mortgage locks in predictable monthly payments.

And for many, holding a deed to the home brings a sense of independence that far outweighs the satisfaction other investments bring.

Cash, or Mortgage? That Is the Question.

In these competitive home buying times, cash deals have been on the rise. But cash deals aren’t just a competitive tactic in a heated market. Some people prefer to pay their sellers in cash, or pay off their mortgages as quickly as possible — because they dislike debt.

It all depends on your definition of financial freedom. Some don’t feel comfortable with a lot of debt hanging over their financial lives. Sure, by taking out a mortgage, a homeowner frees up funds for retirement investments. Even so, some people crave the sense of independence they get with a mortgage-free home. To the paid-off home fans, complete ownership is more precious than any potential stock market gains they could have earned instead.

Those who buy modest homes, then pay them off as soon as possible, have that much cash freed up to invest at that time.

It’s all about what feels right — for you. Ask your financial pro to help guide your decision.

Complicating Factors: A Few Goal-Related Questions to Consider

When you speak with your tax pro or financial adviser, be prepared for a few questions to come up:

Consider your position later in life, when medical care becomes a growing part of your budget. Can you best manage your healthcare payments if you are not on the hook to repay a mortgage?

Would paying off your mortgage in advance of your retirement years reduce the funds you must withdraw in a given year, and help you qualify for assistance under the Affordable Care Act?

In short, having little or no mortgage debt after retirement offers distinct advantages.

But then, that’s not necessarily an argument against mortgages. It means getting an early start on a mortgage can help homeowners pay it off by the time that matters most.

Funding College: How Children Change the Calculus

There’s another big point to consider, too. This is for homeowners with youngsters who will want to attend college.

Not only your income but also your assets count in the means test for the Free Application for Federal Student Aid (FAFSA). But FAFSA won’t count the equity in your home, or the value of a small business or the funds in qualified retirement accounts, against a household’s financial aid application.

The means test does count cash you hold in regular checking and savings. Keep this in mind when deciding how to allocate your money today.

You’ll need to (a) talk to your financial adviser; and (b) check specific colleges when doing specific calculations. We mention this so you have the point on your radar.

Quick Start Tips: Can Buyers Speed Up the Process?

If you want to buy a home, but are off to a late start, worry not. One way to jump-start the process is picking a unit in a popular condo property.

Is the market you’re looking at very pricey? Then find an online buy versus rent calculator. Note that there is no way to build equity other than to hold onto that deed for a while. If you love the home, that should not be hard to do — but it will take time. Remember that the break-even point is shifting, and demanding patience from homeowners.

Some buyers speed up their journey to financial independence by buying properties with 2 to 4 units, possibly house hacking. This way they recruit renters to help cover expenses: the home loan, and certain costs of home upkeep.

Having a regular cash flow while steadily repaying your home loan is a time-honored formula. Bonus for house-hackers and small investor-buyers: eligibility for rental property depreciation tax breaks.

At the End of the Day…

There’s no place like home. People may want to own theirs for sound financial reasons. Those reasons haven’t changed. And to own a comfortable home is, to many, vital to a sense of well-being.

Built-up home equity can defray retirement living costs. It can become a treasure to pass down through generations. And buying a home can be a buffer against inflation.

Still, renting can be a perfectly good decision. Those with the flexibility to find good, inexpensive rental properties may achieve their goals perfectly well. People can buy or rent for sound financial reasons.

When it comes down to it, choosing to buy rather than rent is more about personal circumstances and preferences than it is about achieving financial freedom. But it’s true that owning can lock in predictable housing costs for years. And one day, if all goes according to plan, an owner can enjoy retirement with a paid-off mortgage.

Supporting References

Deeds.com: Buying a House to Save Money? It’s a Tried and True Method (Jun. 22, 2020).

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