Top 10 Financial Benefits of Home Ownership
1. Owning a home builds wealth over time
We’ve all heard this. Your friends, your family, even complete strangers have been telling you for years that you need to stop renting and purchase a home because if you don’t you’re just throwing away money. What does that actually mean!?! Well, let me count the ways…
2. Increased Equity
What is equity? When you purchase a home, a portion of every mortgage payment you make goes towards reducing the amount that you owe on your mortgage. The difference between what you can sell your home for vs. what you still owe is known as “Equity.” Now, how does this benefit you? Every payment you make on your mortgage increases your equity. So, let’s just say you bought a house for $200,000 and after 15 years you decide that it’s time to move. Well, since you’ve been paying your mortgage diligently every month, you now only owe $120,000 on the home, and on top of that, the prices of homes in the neighborhood have increased and homes just like yours are now selling for $250,000. Do you know what that means? If you sold your home for $250,000, and you only owe $120,000 on it, guess what goes into your pocket? A whopping $130,000 in built up equity, that’s what! The longer you stay in your home, the more your equity increases!
3. Tax Benefits – mortgage tax deduction
Owning a home must have some benefits when it comes to tax time, right? The answer is Yes. Yes it does. One of the tax benefits of owning a home is called a “Mortgage deduction.” As a homeowner you are able to deduct the interest you pay with your mortgage. Let me be clear about this. A mortgage payment is typically made up of 4 things, Principal, Interest, Taxes, and Insurance (PITI). At the end of the year, you’ll get a statement from your lender letting you know how much interest you paid over the year, and that amount is tax deductible!
4. Tax Benefits – Property Tax
Uncle Sam let’s you deduct the Real Estate property taxes you paid on your primary residence. Just like you pay taxes for owning a motor vehicle each year, the tax man also sends you a bill to pay Real Estate property taxes. The good news is you can deduct that total amount from your taxable income!
5. Tax Benefits – Points deductions
When you purchase your home, your lender will give you the opportunity to decrease your interest rate by paying “points,” also known as “origination points,” or “discount points” up front. Basically, if you hear “points,” that’s what it is. Those points are tax deductible if the home is your primary residence.
6. Tax Benefits – Capital gains Exemption
Here’s another term you’ve probably heard before…”Capital Gains”. What is Capital Gains? First of all, let’s start by understanding what a “Capital Gains Tax” is. When people who purchase homes and decide they want to sell within 2 years (usually investors), they are subject to a “Capital Gains tax,” which is basically a tax on the profit they make when selling a home higher than the price they paid for it.
A “Capital Gains Exemption” is the benefit you enjoy when you purchase a home and live in it as your primary residence for more than 2 years. Basically, when you decide to sell your home, you are eligible to keep any profits up to $250,000 if you are single, or up to $500,000 if you’re married, Capital Gains tax free! How cool is that?
Of course, the profit you make is tied to how much the home appreciates in value, so the longer you live in the home, the better this benefit is.
7. Tax Benefits – Home office deduction
Do you work from home? If so, then you can take a home office deduction! This is more for those who are self-employed, freelance workers, or artists who have a dedicated work space at home. The friendly people at the IRS will let you deduct some of your utility expenses and business expenses, ie. internet service, that you use for your home office.
8. Tax Benefits – The PMI deduction
PMI stands for “private mortgage insurance.” PMI occurs when home buyers are not able to come up with a 20% down payment for their home. A lot of loans are now offering buyers the ability to put down 5%, 10%, or 15% towards the purchase of a home, but the majority of those loans will require PMI. The good news is, if your income is low enough that PMI payment could be tax deductible!
9. Buying is cheaper than renting…Over the long term
I admit. Renting is usually cheaper than buying in the first few years. When you purchase a home, your faced with closing costs, a down payment, buying furniture, etc., but something funny happens the longer you own the home. The interest you pay in your mortgage payments steadily decreases and more money goes towards paying down your mortgage (principal). The important thing to know is that your money is actually going towards something that will be of value to you later vs. paying rent where the only thing your paying off is your landlord’s mortgage! In 30 years, your landlord will be very happy, while you will be looking for another place to rent.
10. Think of a mortgage payment as a Forced Savings Plan
Every month you pay the same amount towards your home and every month you gain more equity in the home. After 30 years when you have made your last payment, guess what? Congratulations, you now have an asset that you can do what you wish with it! If you rented for 30 years, guess what you’ll have to show for it after all that time? Nothing. Zero. Zilch.
These are just 10 ways that you can benefit financially from owning a home. Of course, since I am a Realtor and certainly not an expert in mortgages or taxes, it would be advisable to consult with a tax professional to get the full details on qualifying for these tax deductions. If you are ready to look for a home, contact me today so you too can start reaping the benefits of home ownership!