The Seven Financial Benefits of Owning a Home

benjamin franklin houseIndeed, there’s no place like home. Let’s examine how homeownership makes “cents”—money and financial stability.

1. Homeownership Builds Wealth Over Time

We were always taught growing up that owning a home is financially savvy. Our parents knew it. But this past decade of real estate turbulence has shaken everyone’s confidence. That is why it’s so important that we discuss this; it is the first “New Rule for Today’s New Market.” A rule that just happens to be new and old at the same time.

2. You Build Equity Every Month
Your equity in your home is the amount of money you can sell it for minus what you still owe on it. Every month you make a mortgage payment, and every month a portion of what you pay reduces the amount you owe. That reduction of your mortgage every month increases your equity. The way mortgages work, the principal portion of your payment increases slightly every month year after year. It’s lowest on your first payment and highest on your last payment. Thus, as the months and years go by, your equity grows.

3. You Reap Tax Benefits

  • Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people this is a huge deduction since interest payments can be the largest component of your mortgage payment in the early years of owning a home.
  • Some closing cost deductions: The first year you buy your home, you are able to claim the points (also called origination fees) on your loan, no matter whether they are paid by you or the seller. And because origination fees of 1 percent or more are common, the savings are considerable. 
  • Property tax is deductible: Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.
  • Interest on home equity loans: In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or line of credit). This allows you to shift your credit card debts to your home equity loan, pay a lower interest rate than the horrendously exorbitant credit card interest rates, and get a deduction on the interest as well.
4. You Get a Capital Gains Exclusion

If you buy a home to live in as your primary residence for more than two years then you will qualify. When you sell, you can keep up to $250,000 if you are single, or $500,000 if you are married, in profit, and not owe any capital gains taxes. Now, it may sound ridiculous that your house could be worth more than when you purchased it after these past several years of falling house prices. However, if you purchased your home anytime prior to 2003, chances are it has appreciated in value and this tax benefit will come in very handy. 

5. You Can Use Home Equity as Leverage
Building up equity in your home allows you eventually to leverage that equity to pay for other expenses in life. And as we just discussed, unlike interest payments made on a credit card balance, home equity loan interest payments are deductible. For many homeowners, it makes sense to pay off this kind of debt with a home equity loan. Though some states restrict use of home equity loans, you can typically borrow against your home’s equity for a variety of reasons, including to make home improvements, pay for an education, cover medical bills, or start a small business. But be warned: A home equity loan or line of credit is not a bottomless piggy bank. Just because you have available equity in your house, be very conservative when you pay off your credit card bills or borrow against an equity line of credit. Too many homeowners treated their homes like piggy banks to crack open anytime they wanted to take a vacation, buy a new car, or pay for college tuition. When home prices dropped they found themselves equity poor and in trouble.

6. A Mortgage Is Like a Forced Savings Plan
Paying that mortgage every month and reducing the amount of your principal is like a forced savings plan. Each month you are building up more valuable equity in your home. In a sense, you are being forced to save—and that’s a good thing.

7. Long Term, Buying Is Cheaper than Renting
In the first years it may be cheaper to rent. But over time as the interest portion of your mortgage payment decreases, the interest that you pay will eventually be lower than the rent you would have been paying. But more important, you are not throwing away all that money on rent. You gotta live someplace, so instead of paying off your landlord’s home or building, pay off your own!

As always, you must look very hard at your personal situation before making the big decision to buy. Stay tuned to my blog as we explore more on this topic. 

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