Questioning your decision to buy? Here are 7 ways owning a home is a smart money move.
The financial benefits of homeownership are evident year-round. Let’s examine how homeownership makes “cents” — from tax benefits to financial stability.
1. Homeownership builds wealth over time
We were taught growing up that owning a home is a financially savvy move. Our parents and grandparents thought so as well. But this past decade of real estate turbulence has shaken everyone’s confidence in homeownership. That is why it’s so important that we discuss this again now that we’re in a “new” market. Homeownership can be a very savvy financial move — but only if people buy homes they can actually afford.
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. 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. That is especially true now with the elimination of risky mortgages like negative amortized and interest-only loans — thanks to the new “Qualified Mortgage” rules. The way mortgages work is that 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 mortgage tax deduction benefits
Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. This can be a huge deduction, since interest payments are often 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. Since origination fees of 1% 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.
4. Tax deductions on home equity lines
In addition to your mortgage interest, you can deduct interest paid on a home equity loan (or line of credit). You can transfer your credit card debts to your home equity loan, pay a lower interest rate, and get a deduction on the interest as well.
5. Capital gains exclusion
If you buy a home to live in as your primary residence for more than two years, then you qualify for this deduction. When you sell, you can keep profits up to $250,000 if you are single, or $500,000 if you are married, and not owe any capital gains taxes. It may sound ridiculous to say that your house actually appreciated after these past several years of falling house prices. However, if you purchased your home prior to 2003, chances are, it has appreciated in value and this tax benefit will come in very handy.
6. A mortgage is like a forced savings plan
Paying your mortgage every month and reducing the 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 few years, it may be cheaper to rent. But as the interest portion of your mortgage payment decreases, the interest will eventually be lower than the rent you would have been paying. But more importantly, you’re not throwing away all that money on rent. You have to live someplace, so instead of paying off your landlord’s home or building, pay off your own!