Purchasing home is a big life event. Owning real estate is full of obvious benefits such as building equity, not having to worry about the more volatile rental market and putting down roots. Buying a home is certainly a strong financial asset, but what exactly are those benefits and what do they mean? In today’s blog post I cover some of the financial benefits of owning a home and how they might impact your life.
Saving on Taxes
While homeowners have additional expenses such as property tax and maintenance, there are some important tax deductions. You can deduct the amount of interest you pay on your home loan each year up to a total of $1m of debt. You may also be able to deduct some or all of your PMI if you meet certain income requirements.
Hedge Against Inflation
Owning a home is a good way to protect yourself from inflation. Consider this: If you have a fixed-rate home loan, the price you pay for housing will never change – no matter what happens to the economy. The amount you pay every month is locked for the term of your loan, whether that’s 15 or 30 years. Even adjustable rate mortgages come with an interest rate cap, so you’ll always know the maximum potential mortgage payment.
Renters are less secure. Sure, when renting your monthly payment is locked into a lease. But once the lease is up all bets are off.
The equity in your home is the amount of money you can sell it for minus what you still owe. Every month that you make a mortgage payment you decrease the amount that you owe. This reduction of your mortgage every month increases the equity in your home.
Mortgages work in that the principal portion of your payment increases slightly every month. It’s highest on your first mortgage payment and lowest on your last mortgage payment. The price on real estate typically increases as well. This equity is an excellent investment in the future when you later decide to sell.
Pay a Low Mortgage Rate
While interest rates have been slowly climbing the past several weeks, they still significantly lower than they have been historically. 30 year fixed rate loans are barely above 4 percent while 15 year fixed rate loans are hovering around 3.25%.
Over the long run, low interest rates on your home loan can make owning a home much cheaper than renting. Even after factoring in other expenses such as property tax, homeowner’s insurance and closing costs the financials often work out in the buyer’s favor.