Top 5 Financial Benefits of Owning a Home
Learn the major financial benefits of homeownership. Plus—4 tax saving tips for savvy buyers.
Laura Adams, MBA
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Top 5 Financial Benefits of Owning a Home
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Since the mortgage crisis, whether it’s better to own or rent your home has been a controversial topic. Some people have sworn off homeownership forever and others have decided that there’s never been a better time to buy multiple properties. No matter your opinion, you should understand the 5 major financial benefits that homeowners receive so you can evaluate if becoming one is right for you.
Benefit #1: Paying a Low Mortgage Rate
Undoubtedly, one of the best reasons to make the leap into homeownership right now is that borrowing money is cheap. Interest rates are at historic lows, below 4% for a 30-year, fixed-rate mortgage and below 3.25% for a 15-year term.
Here’s an example using the current interest rates: The principal and interest you’d pay for a fixed-rate mortgage of $150,000 costs about $700 a month over 30 years, or $1,000 a month for 15 years. Ten years ago these same mortgages would have cost $1,000 for the 30-year option and close to $1,300 for a 15-year loan because the interest rates were higher.
Over the long run, low interest rates can make owning a home much cheaper than renting, in many parts of the country. Of course you have to factor in additional expenses—such as property tax, insurance, maintenance, a down payment, and closing costs—when considering whether you can truly afford to own a home.
Benefit #2: Paying Low Home Prices
The second financial benefit to buying a home in our current economy is that real estate prices are depressed. In other words, real estate is still a bargain in most areas of the country.
If you have a home to sell, that’s not particularly comforting. But if you’re a first-time home buyer, you have a great opportunity to get into the real estate game at prices you might never see again. As home prices eventually trend back up, the appreciation allows homeowners to build wealth.
Benefit #3: Hedging Against Inflation
And speaking of prices going up, another often-overlooked financial benefit of owning a home is that it’s a solid hedge against inflation.
Consider this: If you have a fixed-rate mortgage, the price you pay to have a roof over your head can’t change—no matter what happens to interest rates or the economy. The cost of your home is locked in for the term of your loan, such as 15 or 30 years.
Even adjustable-rate mortgages come with an interest rate cap, so you know the maximum potential mortgage payment.
On the other hand, when inflation causes the price of goods and services go up, rent prices can skyrocket, which can make owning a home much more affordable when inflation rears its ugly head.
Benefit #4: Building Equity
The fourth financial perk of owning a home is that you can build equity, which is the value of a property that you actually own. For example, if your home is valued at $175,000 and you owe $100,000 to the lender, you have $75,000 in equity.
What’s really great about a fixed-rate mortgage is that each payment is made up of a principal and interest portion. With each monthly payment, you automatically reduce your outstanding loan balance by a slightly larger amount. Therefore, every payment you make means you own more of your home and owe less. This is a stark contrast to paying rent, which is a pure out-of-pocket expense.
Although real estate values can go up and down, over the long term they have appreciated. If your home value goes up at the same time that your debt goes down, that’s a really powerful combination. Owning real estate gives you the opportunity to build wealth from price appreciation, paying down your mortgage, or from both.
Benefit #5: Saving Money on Taxes
Yes, homeowners have additional expenses such as property tax and maintenance. However, the following 4 costs are tax-deductible if you itemize deductions on your tax return:
- Mortgage interest: You can deduct the amount of interest you pay on your home loan each year up to a total of $1 million of debt. If you also have a home equity loan or line of credit, the interest you pay for it is also deductible up to $100,000.
- If you want to know more about who’s entitled to claim this valuable deduction, check out the Mortgage Interest Deduction FAQ Video at SmartMovesToGrowRich.com. You’ll find out what’s permitted in different situations, like when you buy a home with someone else or make mortgage payments but aren’t listed on the mortgage or deed.
- Points: You can deduct “points,” which is interest you pay upfront at closing for your new home mortgage. This is the case even if you negotiate to have the seller pay points for you.
- Property taxes: You can deduct any state or local taxes charged for your real estate.
- Private mortgage insurance (PMI): You can deduct some or all PMI premiums you may be charged when your down payment is less than 20% of your home’s value. You’re ineligible for this deduction if your adjusted gross income exceeds $109,000 (or $54,000 if you’re married but filing separately).
In addition to these annual tax breaks, one of the biggest tax savings for homeowners occurs when you sell your home. That’s because up to $250,000 of profit (or $500,000 for a couple who files taxes jointly) is not taxed as long as you’ve lived in the home for 2 of the previous 5 years before the sale. This benefit it called the capital gains exclusion and it’s available no matter your age and as many times as you sell a primary residence in your lifetime.
Money-saving tax breaks are fantastic, remember that many expenses—such as homeowners insurance, homeowners association dues, maintenance, renovations, and local tax assessments for improvements, like new sidewalks—are not tax deductible.
Should You Buy a Home?
There’s a lot to consider when it comes to buying a home—both financial and non-financial. It certainly isn’t cheap and could leave you in a bad spot if you need to pick up and go. But if you know you can stay in a home for at least 5 years and want to put down roots in a community, the long-term financial rewards of buying can really add up.
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More Resources:
What Is the Best Type of Mortgage?
How to Claim the Home Mortgage Interest Deduction
Should You Rent or Buy a Home?
How to Pay Less Tax Using Deductions and Credits
What is Private Mortgage Insurance (PMI) and How Can You Get Rid of It?
How Is the Sale of Your Home Taxed?
FAQ on the Mortgage Interest Deduction (Video)
Image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.