AAaahhhh! March! Spring is on its way and the home buying season will soon begin. If thinking about owning a home then this article is for you!
Owning a home has been called the “American Dream”. Before buying a home, one of the 1st steps is to determine if owning a home is right for you. It’s important when planning that the pro’s and con’s are strongly considered.
Once you decide that owning a home is right for you, there are a lot of benefits (some obvious, some not so much) to home ownership ….. and not all of it is about money.
5 Benefits to Home Ownership
Cash Source
A hidden benefit of home ownership is that it is a HUGE source of cash. Here are a few ways that owning a home can provide a source of money especially in case of an emergency.
Building Equity
If you stay in your house long enough (at least 5 to 7 years), you can make a nice profit when selling your home. Housing prices vary based on supply and demand, geographic location, and population growth in a given area.
For example, I bought my home in 2000 for around $120K. Earlier this year, it was valued at over $240K and I did nothing to get that valuation. Given the home sale prices I have seen in my area, I know I can get more than this estimate especially when the home improvements are taken into account.
The reason for this is that your house builds equity over time and is an appreciating asset. For those not familiar with this term equity means the difference between the price paid to originally buy the house and what the value of the house is today.
Your home equity is the portion of the home that belongs to you and the mortgage portion is what the bank owns. There are 2 main ways to build equity:
- Make your monthly mortgage payments
- Home value appreciating over time
You receive the home equity as cash when the home is sold. On the other hand, renting does not recoup any housing costs spent while living there. Here is an example:
Buying A House: 20% is placed as a down payment on a $200K home. Given a 3% interest rate, the monthly payment is around $872. Five years later, the home is sold for $240K. After paying off the mortgage, you keep $97,713! Here is the breakdown, down payment ($40,000), principal payments ($17,713), and appreciation ($40,000). Not bad for doing nothing, huh? 😊
Renting an apartment: Now let’s look at renting. In the same timeframe you decide to rent an apartment for $900 a month instead of buying because you might get transferred and you want to stay flexible. Before you know it, 5 years have passed, and you want to buy a home. What did it cost you to rent? About $54,000!
That’s right! By renting instead of buying the net difference in money lost is really $151,713! ($97,713 lost as opportunity cost plus $54,000 in rent payments).
The longer a home is owned, the more the principle is paid down. As the balance on the mortgage gets lower, the house also appreciates to build equity. After a few years, there can be a sizable amount to take advantage of.
HELOC
Another way to use the equity in your home to your advantage is by creating a home equity line of credit (HELOC).
A great benefit of owning a home is that you can tap into the equity to help fund home improvements, payoff personal debt, or even invest (it’s worthwhile depending on the investment chosen).
This is where a HELOC can help you. A HELOC is essentially a 2nd mortgage and has a lien on your property. A lien entitles the entity lending the money to collect on any defaults by using your home as collateral and is 2nd in line to the mortgage.
This means that if you were to get into financial trouble and had to sell your home, your mortgage provider would get paid back 1st, the HELOC provider would be paid with whatever is leftover up to the amount owed. Anything else leftover goes to you.
A HELOC is essentially a line of credit. You can borrow from the line of credit anytime during the drawdown period. When that period ends, you have a certain amount of time to payoff the balance owed.
I have used a HELOC in the past to pay for our wedding. I tapped into the equity of our home and used it to pay for all our wedding expenses. My wife was working at the time, so it was easy to payoff the HELOC balance. It came in very handy since I was paying for my master’s degree, fixing up my house, AND getting married all at the same time!
Cash Out Refi
Another way to tap into the equity of your home is a cash out mortgage refinance (“refi” for short).
Here’s how it works. You take out a new mortgage that is worth more than you currently owe. The money is used to pay off the original loan and closing costs. The remainder is pocketed and used any way you see fit.
If you want to pay off debt, go for it. If you want to invest in a rental property, be my guest. If you want to go to Vegas, play roulette, and bet it all on black……. You can but I HIGHLY recommend against that! 😊
The good news is you can borrow up to 80% of your home’s value!
A cash out refi is good for when you want to do home improvements (i.e. add an addition onto your house) or if you are in dire financial straits and want to consolidate debt to lower your monthly payments.
I did.
Years ago, I used a cash out refi to pay down a lot of my kid’s medical bills. I paid off the old mortgage, covered closing costs, and opened a new, larger mortgage so I could use the extra cash to pay down debt.
In the end, I consolidated tens of thousands of dollars of high interest debt into 1 payment AND saved hundreds of dollars a month on interest payments.
On top of that, my new mortgage payment was actually LESS that my original mortgage payment! The trick was that due to the much lower interest rate, I borrowed just enough to cover my debt payoff while also lowering my mortgage payment. PLUS, I saved money on the on the payments as well since they were now paid off.
The bad news is that I had to get a new 30-year mortgage to ensure the payments were low enough to keep within reason. Don’t worry, I have a plan for how to catch up on that too!
We’ll talk about that plan another time…….. 😊
Reverse Mortgage
This type of mortgage is newer and has started to gain traction especially in the retirement community.
With a reverse mortgage, the bank makes monthly payments to you based on the equity in your home and the current interest rate. This occurs every month until either you pass away, you move out, or the equity is paid to you in full. At this time, the bank now completely owns your home and you must find a new place to live.
Homeowners can apply for this type of loan if they are at least 62 years old to take advantage of this type of loan. It’s the type of loan that is best used as a last resort after all retirement income options have been exhausted.
Also keep in mind, if there is a balance owed on the house, the mortgage provider is paid in full 1st and THEN you get whatever is leftover as a series of monthly payments.
IMO not the best option to pursue but an option, nonetheless.
Tax Advantages
Owning a home has a plethora of tax advantages that can help to save money each year. Here are a few:
Mortgage Interest Deduction
You can deduct the mortgage interest paid on your federal income tax return. To take advantage of this, deductions needs to be itemized on a Schedule A. Your state may also offer its own deduction. Mine doesn’t but some do.
Mortgage interest paid can be deducted on up to $1M ($500,000 if married filing separately) of mortgage value if purchased after December 17, 2017. Before that it was up to $750,000 ($375,000 if married filing separately).
Mortgage Insurance Premiums
Mortgage insurance premiums can be deducted on your federal tax returns. To take advantage of this, deductions needs to be itemized on a Schedule A to show the insurance contract was issued after 2006.
NOTE: The amount deducted depends on how much is paid toward mortgage insurance and your income.
You also need to prove that your adjusted gross income (AGI) is below $109,000 ($54,500 for couples filing separately).
Property Tax Deduction
Property taxes can be deducted of your federal tax returns if you itemize. This also includes local income taxes and sales taxes paid to state and local governments.
The dollar limit is $10,000 ($5,000 if single or married filing separately).
Capital Gains
Lastly, if a profit is made when selling a home and if you lived in it for at least 2 of the last 5 years before selling, you do not have to pay capital gains taxes!
Eligible homeowners can exclude up to $500,000 in profits on federal tax returns (Up to $250,000 for single filers or married filing separately)
Increase Cash Flow
If you regularly read my articles, you know I am a big proponent of maximizing your cashflow. Home ownership is an enabler for this. Here is how home ownership can help with your cashflow.
One of a person’s greatest financial assets is the ability to generate income over their lifetime. Home ownership allows a person to fix their biggest expense, their home, over time. Even if property taxes and homeowner’s insurance increase over time, the mortgage payment remains relatively fixed year over year.
As income increases due to becoming established in your career, stable monthly payments enable expenses to remain fixed. This allow cashflow to be optimized. Once a home is owned, you have the option of steady monthly mortgage payments which enable homeowners to both save money and easily budget their expenses.
On the flip side, one of the wildcards with renting is the unknown that comes with year over year monthly payments. It’s very plausible and even likely that monthly rent payments can change year over year during lease renewal.
Stable monthly payments that come with home ownership also provide peace of mind since it creates a predictable monthly budget.
Freedom and Flexibility
Owning a home gives you literally complete control over where you live, how you live, and what you want to do with the property. As long as local laws are followed, you can renovate and update the home as you see fit.
A huge benefit of home ownership is the freedom to make changes. Whether its as simple as painting a bedroom or as complex as completely remodeling a kitchen, when a home is owned changes can be made as seen fit. Hell, if you want window shutters painted purple with pink polka dots, then you can do it!
On the other hand, renting a property has its limitations. When you rent a property, it can be difficult to make even the simplest of changes since it’s often spelled out in the leasing agreement that the property cannot be altered in any way.
Plus, the ability to make changes to a property is not only a great way to make a house feel like a home, but it can also provide a nice bump in the value of the property.
Establish Roots
Buying a home gives you an opportunity to pick and choose where you want to live. One of the most important factors for a home purchase is location of the home. Buyers can pick where their home is in proximity to their employer, what school district it is in, and what amenities are nearby.
Owning a home can provide buyers with a sense of pride not only in their home but their community as well. Building relationships with neighbors, local politicians, and local community leaders is something that can occur organically and is enabled by home ownership.
A common trend among homeowners is stability. Since buying a home is a long-term commitment, moving every few years become unlikely. Buying a home only to turn around and sell it a couple of years later can be a financially costly decision. It takes years to recoup the cost of buying the home and the equity built up.
If you’re purchasing a home, you need to be confident that you plan to stay in the property for an extended period of time before making such a large purchase.
Where To Go From Here?
Good question. Only you can decide that. If still uncertain, I wrote an article that compares renting vs buying to help you out. Check it out here.
If you are certain home ownership is for you and just not sure where to start, try The Mortgage Reports. They have a section on the mortgage basics that I found to be helpful and wished I had this type of resource when I purchase my home. Check it out here.
Not sure how much you can afford, Quicken Loans has a mortgage calculator that I found to be helpful. Remember, this is only a guide.
There is a ton of useful information out there to guide you on your journey and I’ll be writing an article soon on the process I used to calculate how much home you can probably afford.
Until next time………
Live The Life You Love, Want, and Deserve 😊