Homeownership is an enduring part of the American dream, not to mention the American way of life. More than half (64.5%) of U.S. households own the roof over their heads, and three of the other four aspire to own it. Homeownership is considered a sign of maturity, stability, and financial independence. It can even be the path to some profit. Here are three great reasons to become a homeowner.
It may not be fair to renters, but the tax laws favor homeowners—no question about it. If you rent, you pay the owner’s mortgage interest and property taxes as part of your rent, but only the owner gets to deduct them from taxable income. Fortunately, you don’t have to be a landlord to claim these write-offs. All you have to do is own the place.
In the early years of a home mortgage, nearly all of your monthly payments go toward fully deductible interest. Take a conventional, 30-year, $100,000 mortgage at a fixed rate of 5 percent.
Each year interest and principal payments total $6441.84. In the first year more than 90 percent of your payment is deductible as interest. Even in the 15th year, about 70 percent of your monthly payments would be deductible.Interest on up to $1 million of mortgage debt is fully deductible. What this is worth to you depends on your tax bracket.
When you sell the place, you can make a profit of up to $250,000 ($500,000 for a couple) without owing a dime of tax. There is absolutely no other way to make that kind of money and legally get to keep it all.
Homeowners can also use the equity in their home as a source of tax-sheltered loans. You can borrow against your home—through either home-equity line of credit or a second mortgage or a —and deduct the interest you pay.
Most people buy a home with a loan. This means you can profit when the price of your home increases. That’s the “leverage” everybody talks about. The bigger your loan as a proportion of the home’s value, the greater your leverage. Say you buy a home for $100,000 with no mortgage and sell it three years later for $110,000. The $10,000 gain represents a 10 percent return on your $100,000 outlay after three years. That’s okay, but not great.
Now look at the deal another way: Make a down payment of $20,000 and get a mortgage for the rest. You still make the $10,000 profit, but you’ve invested only $20,000 to get it. Your return: a spectacular 50 percent (ignoring for the sake of simplicity the cost of the loan, tax angles, commissions, and other costs).
Hedge against Inflation
People aren’t worried much about inflation these days, but what if it were to heat up? What would happen to home prices? Well, let’s look to the past for a clue. In the high-inflation period from the mid-1970s to the early 1980s, the cost of living rose about 70 percent. Home prices doubled in the same period. Since then, in a time of generally tame inflation, home values in most of the country have risen a little faster than the inflation rate, providing at least some profit potential, and, in more recent years. If inflation soars again, homeowners should be well protected against its damage.
If you are considering purchasing a home, contact us today. We can help you begin your journey toward owning a home.