Home ownership can build wealth over time….if you buy a home that you can actually afford. You build wealth(equity) every month you own your home. Your equity in your home is the amount of money you can sell it for minus what you still owe on it(mortgage). The mortgage comes with tax benefits:
- The tax code allows homeowners to deduct the mortgage interest from their tax obligations.
- 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 and are great closing cost deductions.
- Real estate property taxes paid on your primary residence and a vacation home are fully deductible.
In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or line of credit). This allows you to shift your credit card debts to your home equity loan, pay a lower interest rate than the exorbitant credit card interest rates, and get a deduction on the interest as well.
If you buy a home to live in as your primary residence for more than two years then you will qualify for a Capital Gains Exclusion. When you sell, you can keep profits up to $250,000 if you are single, or $500,000 if you are married, and not owe any capital gains taxes. Now, it may sound too good to be true that your house could be worth more than when you purchased it in this falling house prices environment. However, if you purchased your home anytime prior to 2003, chances are it has appreciated in value and this tax benefit will be quite handy.
Paying that mortgage every month and reducing the amount of your principal is like a forced savings plan. Each month you are building up more valuable equity in your home. In a sense, you are being forced to save—and that’s a good thing.
In the first few years, it may be cheaper to rent. Although, over time, as the interest portion of your mortgage payment decreases, the interest that you pay will eventually be lower than the rent you may have been paying. More importantly, you are not throwing away money on rent. You have to live somewhere, so instead of paying off your landlord’s home or building, pay off your own and Build Your Wealth!