If you're thinking about buying a home, this may help you decide if it's the right option for you. Below are the seven best benefits of homeownership.
1. Payment Stability. If you’re renting I’m sure you’ve noticed that rent tends to increase every year. Sometimes these increases in rent are significant enough to alter your budget, or even inspire you to move. And we all know how much moving sucks.
A large proportion of my clients who are first time buyers tell me their primary motivation to buy a home is because their rent increased, and for what they pay in rent they could be making a mortgage payment.
When you get a mortgage, aside from nominal increases in your property taxes or homeowners insurance your monthly payment will not change. The impact of this is significant. As your income increases after several years, the affordability of your mortgage payment can be greatly enhanced. You may find that your friends who are still renting are paying more, for far less than what you have.
2. Tax Deductions. Aside from the stability of your payment, the interest and property taxes you pay on a mortgage are tax deductible. This can also create a considerable savings for you. For example on a $250,000 mortgage at 3.5% over 30 years, you would pay just under $8,700 in interest in the first year. Depending on where you live in the country your property taxes could be in the neighborhood of $6,000 annually.
In this example that’s a total of $14,700 that you don’t have to pay taxes on. If you’re in a 22% tax bracket, that’s a potential $3,234 tax savings. Divided by 12 months of the year that effectively lowers your mortgage payment by $269.50 a month.
I’m not a CPA nor do I play one on TV, so as always check with your tax professional. But I’m sure they’ll tell you the benefits of homeownership deductions can be considerable.
3. Capital Gains Exclusion. Speaking of taxes, here’s another sweet tax benefit. Odds are unless you’re buying your retirement home you’ll likely be selling the home in the future. Capital gains are the profits you gain from the sale of an asset. The IRS has a special tax they levy against you when this happens. For most people the capital gains tax rate is at least 15%.
However, proceeds from the sale of your primary residence are exempt from the capital gains tax as long as you lived in the property for at least 24 months in the last five years. This can be a considerable amount of money.
For example if you profit $50,000 on the sale of an asset and incur a 15% capital gains tax, that will cost you $7,500 of your $50,000 profit. But as a homeowner selling their residence, you’ll have the luxury of keeping the tax man at bay.
4. Building Equity. Each month you make a mortgage payment a portion of that payment will go towards paying down the mortgage debt. When you sell your home the difference between what you owe and what you sell the home for is what goes in your pocket, the term for this is equity. For example if you’ve paid a $250,000 mortgage down to $230,000, you’ve increased your equity position by $20,000.
So each month you pay down the balance of your loan you increase your equity, and thus the amount of money you’ll receive when you sell the property. When you hear people say things like, “when you pay a mortgage you get that money back”; this is what they’re talking about.
Though you’ll never see the portion of your payment that goes towards interest, taxes, or insurance again; the portion of your payment that goes towards paying down your loan balance will come back to you in full.
5. Appreciation. Perhaps an even bigger equity builder than paying down your mortgage is appreciation. Home values don’t stay the same. They generally increase year over year. Over the last five years home values in many parts of the country have risen considerably.
Homeowners have been the recipients of value increases in excess of 30% in several parts of the country. If you bought a home in 2015 for $250,000 it could very well be worth $325,000 today in various parts of the US. In this time, you would have also paid off over $20,000 of the loan balance. Meaning you would be sitting on over $95,000 in equity right now.
Of all the benefits of homeownership, appreciation can have the biggest impact on building your family’s wealth.
6. Improve Your Credit. I’ve shown how home ownership can help you build wealth, but did you know it can help you build credit as well. 10% of your credit score is based on your credit mix. The credit bureaus want to see that you can manage different types of credit responsibly. Having a mortgage helps you broaden your credit mix.
In addition, lenders know that obtaining a mortgage is no small feat. Think about the last credit card/department store card application you completed. One of the questions was very likely are you a renter or homeowner.
That means aside from just reviewing your credit score, lenders are also looking to see if you’ve been able to attain homeownership when deciding if you are a favorable credit risk or not. That means being a homeowner can not just improve your credit score, but it can also enhance your access to credit.
7. It’s All Yours. Perhaps the coolest part of being a homeowner is the opportunity to truly make the home yours. Are you tired of the kitchen cabinets and countertops? Remodel your kitchen. Do you want to have a Disney princess mural painted on your daughter’s bedroom wall?
Go for it! Do you want to make upgrades to the property to make it more aesthetically pleasing? Do it, and know that you’ll benefit from the increase in value not your landlord.
I can’t count how many times I’ve heard a renter talk about things that would improve their home significantly, but either the landlord won’t let them make changes to the property or they just don’t want to invest money into something that isn’t theirs. Owning your home brings about a sense of pride, that cannot be duplicated by renting.
There’s no doubt that these are awesome benefits. But in all fairness, being a homeowner isn’t all sunshine and roses. So be sure to watch my video “what are the challenges of homeownership
”, were I’ll cover some of the downsides to owning your home.