One of the reasons some people prefer renting to owning a home is that they have fears about homeownership that prevent them from buying. A home is the largest purchase a person ever makes in his life, so it is understandable why some people tend to have qualms when it comes to homeownership.
Here are the reasons you should not hold off on purchasing a home:
- Homeownership is a form of forced savings.
When you have a traditional mortgage where you pay down principal and interest, you are forced to save. This is because you are forced to pay your mortgage every month in order to keep your property. Part of each mortgage you pay goes to the principal, which can be considered as savings.
If you are paying your mortgage, make it a point to be a responsible payer all the time. Pay your mortgages through the good times and the bad if you do not want your credit to get crushed. Having a bad credit means not being able to borrow at normal rates for years and losing your down payment.
In the U.S., the average savings rate of 3 to 5% only shows that Americans do not have the capacity and discipline to save. We are bombarded with ads that lure us to spend. We sometimes even tend to compare ourselves to our neighbors who make us feel less worthy when we spend less than they do. Saving money is such a hard thing to do because society makes spending so easy!
While there is no free lunch given a mortgage requires an interest payment, statistics do not lie. The net worth of people who own homes are far greater than renters, primarily because of the forced savings component of paying down principal. Also, it is important to note that the value of real estate appreciates through time, even if the appreciation is due to inflation.
In reality, it is quite hard having to save an amount that is equal to the amount of mortgage debt being paid off. However, it is way harder to save an amount that is equal to the total value of a property’s equity—thanks to capital appreciation.
Imagine paying $120,000 for your dream home’s down payment and paying mortgage for years. Years from now, what started of as a $120,000 downpayment will have turned into a paid off asset which, if you sell, can provide more than $1,000,000 in cash after commission. Homeownership is about that. 12 years later, the property becomes a wholly owned asset that you can include in your own portfolio.
2. Homeownership provides tax savings
The main tax benefit of homeownership is that the imputed rental income that homeowner get is not taxed. While that income is not taxed, homeowners may still deduct mortgage interest and property tax payments, as well as other expenses from their federal taxable income. Homeowners can also exclude the capital gain that they receive from the sale of a home.
Homeowners do not have to count the rental value of their homes as taxable income, even if that value is just as much a return on investment as are stock dividends or interest on a savings account. This form of income is not taxed and is therefore a huge financial benefit to homeowners.
Usually, homeowners have the power to deduct both mortgage interest and property tax payments and other expenses from their federal income tax. Since in a well-functioning income tax, all income would be taxable and all costs of earning that income would be deductible, in a well-functioning income tax, there are deductions for mortgage interest and property taxes.
Unfortunately, our current system does not tax imputed rental income received by homeowners, so it is difficult to justify giving a deduction for the costs of earning that income.
Another tax benefit of homeownership is that homeowners can exclude the capital gain they get from the sale of a home. These benefits are worth more to taxpayers in higher-income tax brackets than those who are in lower brackets.
When it comes to profits from home sales, homeowners have an edge. Taxpayers who sell their assets usually pay capital gains tax on any profits made on the sale. Homeowners, however, can exclude from taxable income up to $250,000 of capital gains on the sale of their homes if they are able to satisfy certain criteria, which include 1) having maintained the home as their principal residence in two out of the preceding five years, and 2) not having claimed the capital gains exclusion for the sale of another home during the previous two years.
The exclusion provision saved homeowners an estimate of $32 billion in income tax in fiscal year 2017.
Property tax deductions are just as beneficial to homeowners. In the U.S., homeowners who itemize deductions are able to reduce their taxable income by deducting the property taxes they pay on their homes. This deduction is a transfer of federal funds to jurisdictions imposing a property tax, allowing them to raise property tax revenue at a much lower cost to constituents. The deduction saved millions of homeowners at least $33 billion in income tax in fiscal year 2017.
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About This Video: The American Dream of homeownership is alive and well. Before you sign another lease, let’s get together to help you better understand all your options.
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