Homeownership has long been a staple of the American Dream. There is no place like home. One of the main reasons homeownership has been so widely coveted is due to the financial benefits of buying a home.
If you are contemplating buying a home it is important that you know about these financial benefits so you can take full advantage of them. Keep in mind there are disadvantages to buying a home too. We will briefly discuss these as well so you can make an informed decision when it comes time to decide whether to buy a home or continue to rent.
The Financial Benefits of Buying A Home
1. Tax Benefits for Homeowners
- Mortgage deduction: The tax code allows homeowners to deduct their mortgage interest from their tax obligations. This can be a huge deduction since interest payments can be the largest component of your mortgage payment in the early years of owning a home. These deductions can greatly decrease your overall tax obligations, but many first time homeowners are unaware of these savings when considering renting vs buying.
- Closing cost deductions: The first year you buy your home, you are able to claim the points (also called origination fees) on your loan, no matter whether they are paid by you or the seller. And because origination fees of 1 percent or more are common, the savings are considerable. In general, you should hire a professional to help you with your taxes in the year following your purchase. This will ensure you maximize the tax benefits of homeownership.
- Property tax deductions: Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.
2. Predictable Monthly Payments
Have you ever lived somewhere that increased the price of rent every single year? Frustrating right? A fixed-rate mortgage allows you to accurately forecast your payments for years to come. While there are other, unpredictable expenses homeowners incur (more on that in a little), you can rest assured that your mortgage payment will not suddenly spike.
3. Forced Savings Plan
Many American’s struggle to save for retirement. In fact, 65% of Americans have little or nothing saved. This is an alarming fact. Buying a home is often a saving grace for many Americans, as it acts as a forced savings plan. When you pay your mortgage every month, you are building equity. Unlike rent, this money isn’t gone forever. While liquidating a home is harder than stock, it still acts as a great environment to save money and build wealth.
4. Long Term, Buying A Home Is More Affordable Than Renting
Initially, the cost of homeownership is higher than renting. Over time, however, your interest payments will decrease. Even better, the payment you make won’t be for nothing. You have to live somewhere. The question is, do you want to pay off your landlord’s home or pay off your own?
While there are cities in America where it is cheaper to rent than buy, generally buying a home is much more affordable in the long run.
5. Owning A Home Can Greatly Improve Your Credit Score
How is your credit score? Chances are it could be improved. Mortgage payments are one of the best ways to improve your credit score. The consistent nature of mortgage payments shows lenders you are a trustworthy borrower. Credit bureaus also often give more weight to a mortgage payment history than to revolving accounts like credit cards. When you rent, your payments aren’t often considered in your credit score.
A healthy credit score can greatly decrease your mortgage payments in the future. The best time to start improving your credit score is now. Buying a home can certainly help!
6. Capital Gains Exclusion
When you buy a home and live there for at least two years, any profits gained are exempt from tax. Technically speaking, up to $250,000 in profit is exempt if you are single and $500,000 is exempt if you are married. While the recent real estate market hasn’t delivered much profit, historically homes increase in value over time.
7. Build Wealth Over Time
Most people grew up hearing that buying a home is a sound financial decision. Despite the recent downturn in the market, this is still true. The important caveat is that you must buy a home you can afford.
Keep Reading: How Much House Can I Afford?
Disadvantages of Buying A Home
While buying a home is a savvy financial decision, renting can be a better choice depending on your situation. It is important to consider if you are ready to buy a home.
1. Buying A Home Is A Long-Term Financial Commitment
The benefits of homeownership are only felt long-term. The upfront investment and long-term responsibility can be too much for some people. If you plan to move or enjoy the flexibility of being able to relocate, renting provides much greater freedom.
2. You Are Responsible For All Maintenance
Remember that helpful maintenance worker that would fix anything and everything at the apartment you rented? You are now that maintenance worker. The maintenance required to keep a house in pristine condition can be overwhelming. Most first time homeowners underestimate this part of homeownership.
You are responsible for mowing your grass, shoveling snow, replacing fixtures, etc. From a financial standpoint, you need to account for these expenses in your budget.
3. The Down Payment
Oh, the dreaded down payment. The number one reason people don’t buy a home. We have discussed many financial benefits of buying a home. It is clear that paying a down payment is worth it in the long run. However, draining your savings to buy a house can cause some serious short-term issues.
Home ownership comes with risk. The key is to weigh the pros and cons based on your specific situation. Don’t let emotion cloud your judgment. If you are a first-time homeowner, consider taking an educational course to ensure you make an educated decision.
Also, keep in mind that in many situations renting makes more sense than buying. The work environment is changing. Long-term employment at one company is becoming rarer. Being flexible to move in pursuit of promotions or better-paying jobs is a major benefit of renting.
The bottom line is, buying a house is a major decision with long-term implications. While there are many financial benefits to buying a home, each situation is different. With proper education and a sound advisor, we are confident you will make the right decision about whether to rent or buy. Want professional assistance? Let’s chat!