Find out how buying a home can improve your personal finances
Money Girl
252 MG Top 5 Financial Benefits of Owning a Home
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It's available at your favorite bookstore in print, or is an e-book for your PC, Mac, e-reader, or smartphone. Since the mortgage crisis, whether it's better to own or rent your home has been a controversial topic. Some people have sworn off home ownership 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 five major financial benefits that homeowners receive so you can evaluate if becoming one is right for you. Benefit number one, paying a low mortgage rate. Undoubtedly, one of the best reasons to make the leap into home ownership 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 cost about $700 a month over 30 years, or 1,000 a month for 15 years. 10 years ago, these same mortgages would have cost 1,000 a month for the 30-year option and close to 1,300 a month for the 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 cost when considering whether you can truly afford to own a home. Benefit number two, 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 many areas of the country. If you have a home to sell, well, 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 number three, 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 to go up, rent prices can skyrocket, which can make owning a home much more affordable when inflation rears its ugly head. 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Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. (upbeat music) Benefit number four, 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 inequity. 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 number five, saving money on taxes. Yes, homeowners have additional expenses, such as property tax and maintenance. However, the following four costs are tax deductible if you itemize deductions on your tax return. Number one, 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 wanna know more about who's entitled to claim this valuable deduction, check out a video I posted for you at smartmoves2growrich.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. Just visit smartmoves2growrich.com, click the button that says videos, and watch the mortgage interest deduction FAQ video. Number two, points. You can deduct points, which is interest you pay up front at closing for your new home mortgage. This is the case even if you negotiate to have the seller pay points for you. Number three, property taxes. You can deduct any state or local taxes charged for your real estate. And four, private mortgage insurance or 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 file taxes separately. I did a previous podcast about PMI called what is private mortgage insurance and how can you get rid of it, which is episode number 176. 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 two of the previous five years before the sale. This benefit is 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, but remember that many expenses are not tax deductible, such as homeowners insurance, homeowners association dues, maintenance, renovations, and local tax assessments for improvements like new sidewalks. 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 five years and want to put down roots in a community, the long-term financial rewards of buying can really add up. If you have questions about buying or owning a home, post them on the Money Girl Facebook page. Just go to Facebook.com and do a search for Money Girl. If you're on Twitter, be sure to follow me under username Laura Adams, L-A-U-R-A-A-A-D-A-M-S, with no space. Also, if you're not already subscribed to the Money Girl podcast in iTunes, that's how most people get the show. Subscribing is free and simply means you'll automatically get each new episode as soon as it's published on the web. And one more thing, there's a brand new ebook from the host of the Nutrition Diva podcast called Nutrition Zombies, Top 10 Miss That Refused to Die that you might want to check out. The diva's real name is Monica Reinegull, and she's a licensed nutritionist and dedicated myth-buster who drives a stake through the heart of 10 persistent nutrition myths so you can get on with eating well and feeling fabulous. I'm glad you're listening to change. That's all for now. 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