It’s the classic American Dream – home ownership. Of course, deciding between renting or owning has been a controversial topic ever since the mortgage crisis. Some people have sworn off owning real estate for good, while others are convinced that now is as good a time as ever to buy property. Regardless of one’s opinion, there are loads of financial benefits that you can realize simply by having your name on the title.
Build Wealth Over the Long Run
There’s probably no better way to develop wealth over time than to invest in real estate. We’ve always been taught by generations past that owning property is not just the ‘American Dream,’ it’s also a great way to strengthen one’s financial profile.
However, it’s important that homebuyers buy only what they can afford, and keep interest rates in mind. During the real estate shake-up over the past few years, plenty of homeowners found themselves in foreclosure, scaring them off from buying real estate in the foreseeable future. Maxing out on a mortgage can be a dangerous place to be, especially if interest rates skyrocket in the near future.
These days, mortgage rates are really low – 3.22% for a 15-year mortgage as of May 13 – making home ownership a much safer bet compared to the 80’s when interest rates spiked as high as 18.45% in late 1981. The idea of sticking only to homes you can comfortably afford to build wealth over time is a rule that stands the test of time.
Build Equity in Your Home Every Time You Make a Mortgage Payment
The equity in your home is equal to the amount of money that you’d be able to sell it for, subtracting what’s still owed on it. Each time you make a payment towards your mortgage, the principal portion is tacked on to your equity, reducing the amount you owe.
This continued reduction of your mortgage gradually increases your equity in the home. Mortgage payments work by slightly increasing the principle portion each month. Your very first payment will consist of the lowest proportion of principle, and highest on the last. So as the years go by, your equity continues to grow.
Hedge Against Inflation
One often-overlooked benefit of owning a home is that it’s a safe hedge against inflation. Think about it: if you’ve got a fixed-rate mortgage, whatever price you pay on your mortgage payments won’t change, even if interest rates fluctuate or the economy goes erratic.
The cost of your property is locked in over the term of your mortgage loan, whether it’s 15, 25, or 30 years. But if you’re renting and inflation kicks in, the price of goods and services shoots up, inevitably causing rent prices to go up. When you make the comparison, owning a home can be a lot more affordable when inflation creeps up.
Save Money on Taxes
There are tax deduction benefits associated with owning a home. The tax code lets homeowners deduct mortgage interest off their tax payments. For a lot of homeowners, this translates into massive savings, considering the fact that interest payments are usually a huge part of a mortgage payment during the early stages of homeownership.
There are also deductions that can be made against closing costs. During the first year of owning property, you can claim the origination fees on your mortgage, regardless of whether or not you or the seller pays for them. Considering origination fees of 1% and above are typical, the savings can be significant. And don’t forget about property tax deductions, which are fully deductible against your income tax.
Save From Capital Gains Exclusion
When you buy a property that’s considered your primary residence for over two years, you can qualify for a capital gains exclusion. This means you can keep your profits up to a maximum of $250,000 if you sell (if you’re single – double that amount if you’re married). And if you bought your home before 2003 when the housing crash started, odds are that it has appreciated in value quite a bit, making this tax benefit even more advantageous.
There’s obviously a lot to consider before buying a home – it’s not a cheap expenditure, and could put you in a bad financial position if you don’t do your due diligence beforehand. However, the benefits could be astronomical if you’re savvy about your decision and the long-term financial benefits of buying a home really add up.
Team up with a mortgage specialist and a real estate agent, and you can reap the rewards of home ownership like millions of others before you have already done.