Let’s analyze how homeownership produces “cents”– from the tax benefits, to good old fashioned financial stability. The financial benefits of homeownership are evident year round, but particularly around tax time– they appear to jump off the page!
1. Homeownership builds wealth over time
We were always taught growing up that owning a home is a financially savvy move. Our parents knew it, and their parents knew it. But this past decade of real estate disturbance has shaken everyone’s confidence in homeownership. That is why it’s so significant that we discuss this again, now that we’re in a “new market.” Homeownership could be a very savvy financial move– but only if people buy homes they can really afford. In 2014, this concept of sticking to a home you can afford to gradually build wealth is a “rule” that just happens to be new and old simultaneously.
2. You build capital monthly, through loan principle amortization
Your equity in your home is the amount of money you can sell it for minus what you still due on it. Monthly you make a mortgage payment, and monthly a portion of what you pay decreases the amount you owe. That reduction of your mortgage monthly improves your equity. That is particularly true now with the elimination of dangerous mortgages like negative amortized and interest-only loans– due to the new “Qualified Mortgage” rules. The way mortgages work is that the principal portion of your payment raises slightly monthly time after time. It’s lowest on your first payment and highest on your last payment. Therefore, as the months and years go by, your equity increases!
3. You reap mortgage tax deduction benefits
Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many individuals this is a big deduction, since interest payments could be the largest component of your mortgage payment in the early years of owning a home.
A few closing cost deductions: The first year you buy your home, you are able to claim the points (also referred to as origination fees) on your loan, regardless of whether they are paid by you or the seller. And because origination fees of 1 percent or more prevail, 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 reasons. (Talk to your accountant for any personal limitations)
4. Tax deductions on home equity lines
In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or credit line). This enables you to shift your credit card debts to your home equity loan, pay a lower rate of interest than the horrendously expensive credit card interest rates, and get a deduction on the interest at the same time. (Talk to your accountant for any personal limitations)
5. You acquire a capital gains exclusion
If you buy a home to reside in as your primary residence for over two years then you will qualify. When you sell, you can keep profits approximately $250,000 if you are single, or $500,000 if you are married, and not owe any capital gains taxes. Currently, it may sound outrageous that your house can be worth more than when you bought it after these past multiple years of falling house prices. However, if you purchased your home anytime prior to 2003, possibilities are it has appreciated in value and this tax benefit will come in very handy.
6. A mortgage resembles a forced savings plan
Paying that mortgage every month and decreasing the amount of your principal is like a forced savings plan. Each month you are developing more valuable equity in your home. In a sense, you are being obliged to save– and that’s a good idea.
7. Long-term, buying is less expensive than renting
In the first few years, it may be more affordable to rent. But over time, as the interest portion of your mortgage payment lessens, the interest that you pay will eventually be lower than the rent you would have been paying for. But more essentially, you are not losing all that money on rent. You gotta live somewhere, so instead of paying off your landlord’s home or property, pay your own!
8. Locking in your housing payment
Housing is not being constructed at a rate that will keep up with the general population growth, or the attrition of old housing structures. As rents continue to go up based on supply and demand, or because of inflation, it’s advantageous to lock your housing payment at a level that may be substantially lower than what you could be paying for in rent in the future.
Good question about intermediate, and long term inventory levels. Over the past couple years inventory levels have been very low. The quantity of sales have dropped substantially over the past few months (at least in the Los Angeles region), as the institutional investors have backed out of the market, and the conventional buyer’s affordability index has taken a hit. Construction of new housing, even with the recent increase in housing starts, still doesn’t keep up with demand. I can see a bit of a housing crunch,as there will be demand for housing, but purchase affordability being an issue (especially as rates go up. Location, and timing, is everything…