Benefits of Owning
Owning a home can seem like an overwhelming and daunting task. Some people might find renting easier and let their landlord deal with the financial institutions. However, a lot of people don’t realize the hardest part about becoming a homeowner is getting through the initial stages of qualifying for the loan.
If you are a first-time homebuyer, you can put down as little as 3.5% of the loan amount on a property. Often times after getting through the loan process, a monthly mortgage payment can be less than a rent check each month. There are substantial benefits to being a home owner.
Think of it this way, your rent check goes to paying your landlord’s mortgage. Why shouldn’t your money go to paying your mortgage?
1. Tax Benefits.
Homeownership can be a fantastic tax shelter and our tax rates favor the homeowner. Immediately upon homeownership the US Tax Code allows for the interest you pay on your mortgage to be fully deductible on your tax return. This continues for the duration of ownership as long as your mortgage balance is smaller than the price of your home. As a reminder interest is the largest component of your mortgage payment.
Other Tax Benefits. In addition, as a homeowner you can deduct property taxes and some of the costs involved in buying a home.
Capital Gain Exclusion. Let’s not forget about the rule no one talks about. If you have lived in your home (primary residence) for at least 2 of the past 5 years, you can exclude up to $250,000 for an individual and $500,000 for a married couple, of profit from capital gains. So, what does this mean? There is no age restriction to qualify and you do not need to buy a replacement home or move up. You can simply exclude the above thresholds from taxes every 24 months. Which also means you could sell every two years and pocket your profit free from taxation, subject to tax limitations.
Favorable Tax Treatment. If you are one of the lucky that receive more profit from the sale of your home than the allowable exclusion, your profit will be considered a capital asset as long as you owned your home for more than one year. Capital assets receive preferential tax treatment, which means the taxable portion (amount above the allowable threshold 250K or 500K for an individual or married couple) of your profit will be much less than you thought.
2. Mortgage Interest Deductions.
At the risk of not getting too detailed with the specifics of taxes and payments. Mortgage principal reduction builds equity. Each month when you pay your monthly payment, part of the payment is applied to the principal balance of your loan which reduces your overall debt to the lender. The amount of principal versus interest paid is set up on an amortization scale. For most loans, let’s use the example of a 30 year fixed loan, (there are some interest only loans, we are discussing plain vanilla loans) the principal portion of your payment is small at the beginning and increases over the life of the loan, while the opposite happens for the interest. The interest is the majority of the payment at the beginning then decreases over time.
Equity Loans. The longer you own your home the more equity you generate by paying more of the principal off. At a later date, those who qualify can borrow against the equity in their home and pull out the cash. There are several financial instruments that allow homeowners to tap into the unused equity within their home. If a homeowner wants to do renovations on the home or carry high credit card balances, a home equity loan could be suitable. Generally speaking, equity loan interest is often much less than credit card or bank loan rates and it is deductible. For many homeowners, it makes sense to consolidate this kind of debt and get rid of higher interest rates with lower interest rate instruments. Please be aware that some sate laws and some lenders have restrictions on what home equity loans can be used for.
More than being a homeowner, which is a tremendous feat in itself. There is another benefit, appreciation. Although the real estate market much like the stock market moves in cycles, over the years real estate has consistently appreciated. There will be factors contributing to more advantageous times to buy such as interest rates, place in market cycle, local economy, etc., however homeownership dates back to our country’s beginning. There will always be a supply and demand market for real estate. Thus, an ever-revolving market cycle that will always work to be as efficient as possible for those whose desire it the most.
4. Freedom & Stability.
I think these go without saying. Saving on moving costs, first and last month’s rent, arguing with the landlord on when something is going to be fixed. You now have the freedom to decorate your home however you want. The stability to know your family has one place to make memories and call home. Building friendships and relationships in your neighborhood without having to move all the time. The pride of homeownership often goes unrecognized; however, it is truly one of the biggest and greatest things you can do for yourself and your family.