Why Buying a Home Can Still Make Financial Sense...Even at Today’s Interest Rates...

I was just having this conversation with a potential new buyer this week. With mortgage rates where they are today, does buying a home actually still make financial sense? When you look at a 30-year mortgage and see how much interest you could potentially pay over the life of the loan, it is totally understandable why some potential buyers look at that total number and think, “How can this possibly be a good investment?” It’s a fair question. But I think it looks very different when you consider what’s actually happening financially over those 30 years. 

You're paying for a place to live, gradually paying down debt, building equity, and potentially benefiting from decades of appreciation. And with a fixed-rate mortgage, inflation can actually work in your favor over time since your monthly principal and interest payment do not change over that 30 years. 

So let’s do the math using a $500,000 home purchase, which is a realistic example for a buyer in the Sacramento real estate market today. 

Suppose you purchase that $500,000 home with 5% down and finance the remaining $475,000 with a 30-year fixed mortgage at 7.25%. Your principal and interest payment would be approximately $3,240 per month. If you kept that same mortgage for the entire 30 years, never refinancing or paying it off early, you would make approximately $1.17 million in principal and interest payments, including about $692,000 in interest. At first glance, someone might say: “Wait. I paid almost $1.2 million for a $500,000 house. How is that a good investment?” But that’s not really the right way to look at the math.

Your initial down payment was $25,000. That $25,000 allowed you to purchase a $500,000 asset. That’s leverage. Now assume, strictly for illustration, that the home appreciates at an average of 4% per year over the next 30 years. Some years will be less, some years will be more. But that is approximately the historic average over the last 100 years. At that rate, the $500,000 home would be worth approximately $1.62 million after 30 years. And at the end of those 30 years, the mortgage would be gone. You would own the property free and clear. 

Those mortgage payments provided you with a place to live for 30 years. That’s an important distinction because the alternative isn't usually living somewhere for free. It's usually paying rent. 

A mortgage payment has two primary components: principal and interest. Interest is the cost of borrowing money. Principal is different. Every dollar of principal you repay increases your ownership in the property. Over time, you gradually replace the bank's interest in the property with your own equity. Meanwhile, if the property appreciates, that appreciation applies to the entire value of the home, not merely the amount you originally put down. That’s one of the powerful financial characteristics of homeownership. 

You might have started with only $25,000 of your own money in a $500,000 property, but you receive the benefit and accept the risk of changes in value on the entire $500,000 asset. 

What you invested the $25,000 in the stock market instead? That's another fair question. Historically, the stock market has produced strong long-term returns. If someone invested that same $25,000 in a broad stock-market index and hypothetically earned an average 10% annual return for 30 years, it would grow to approximately $436,000. That's an excellent return. But it's not an apples-to-apples comparison. 

In the homeownership scenario, the $25,000 is leveraging the purchase of a $500,000 asset. If that asset appreciated at our hypothetical 4% annual rate, it would grow to approximately $1.62 million over the same 30 years. And throughout those 30 years, the homeowner also had somewhere to live. 

The renter who invested the $25,000 would still need to pay for housing during those same three decades. That doesn't automatically make buying superior to renting and investing. But it does mean that comparing the future value of $25,000 invested in stocks with the future value of the house leaves out a very important part of the equation: both people still have to pay for housing. 

There's another benefit that's easy to overlook. With a traditional fixed-rate mortgage, your principal and interest payment doesn't increase as everything else becomes more expensive. That $3,240 principal-and-interest payment in Year 1 is still approximately $3,240 in Year 20. Property taxes, insurance, maintenance and other ownership costs can and probably will increase. But the principal and interest portion of a fixed-rate mortgage stays fixed. 

Think about what inflation does to that payment over several decades. If wages, rents and the general cost of living increase over time, a fixed mortgage payment can represent a progressively smaller portion of a homeowner's income. Rent generally doesn't work that way. A homeowner with a fixed-rate mortgage has effectively locked in a major portion of their housing expense while gradually increasing their ownership of the property. 

And eventually, the mortgage ends...Perhaps the simplest difference between renting and owning is what happens after decades of making payments. After 30 years of mortgage payments, you own the home outright. After 30 years of rent payments, you received 30 years of housing, which absolutely has value, but you generally don't own the property. For many homeowners, that paid-off home eventually becomes one of their largest assets and an important part of their retirement picture. And once the mortgage is gone, their housing expenses can look dramatically different than those of someone still paying market rent. 

None of this means buying a home is always the right financial decision for you. Homes have transaction costs. They require maintenance and repairs. Property taxes and insurance matter. With 5% down, mortgage insurance may also be part of the equation. Home values aren't guaranteed to increase, much less at 4% every year. There are also times when renting makes perfect sense, particularly if you expect to move soon, value flexibility, or aren't financially prepared for the responsibilities of homeownership. And stocks and real estate aren't mutually exclusive. A healthy long-term financial strategy can include both homeownership and investments in the financial markets. 

But over-simplifying our hypothetical home purchase to “I paid $1.17 million over 30 years for a house that eventually became worth $1.62 million, so I only made $450,000” fundamentally misunderstands the economics. You weren't writing a $1.17 million check to purchase a $1.62 million investment. You started with $25,000. Then, month by month, you were paying for housing, paying down debt, building equity, benefiting from leverage, potentially participating in decades of appreciation and moving closer to owning your home outright. 

A home is both a place to live and an asset...That's what makes the rent-versus-buy conversation different from comparing two stocks or two investment funds. A home has two jobs. It provides shelter today while potentially building wealth for tomorrow. Homeownership gives ordinary households access to something that is difficult to replicate with many other investments: the ability to use a relatively small amount of their own money to control a much larger asset, live in that asset while they own it, gradually pay down the debt with money that would otherwise partly go toward housing anyway, and potentially benefit from decades of appreciation. The math won't work for every person, every property or every point in the market. But if you're planning to stay for the long term, can comfortably afford the payment and purchase the right property, homeownership can make a great deal of financial sense, even when mortgage rates aren't at historic lows. Sometimes the biggest mistake in evaluating the investment is looking only at what you pay, without considering what you're building along the way.