Step 2: KNOW THE BENEFITS OF HOMEOWNERSHIP
One of the key factors of buying a home in California is knowing the benefits of homeownership. When done correctly, there are financial and social benefits that outweigh the costs of buying.
What Are the Benefits?
Pride in Ownership
There’s a sense of accomplishment when you buy a home. You saved, you stressed, you prepared and planned. Now you make it your own. Your hard work paid off. The responsibilities come along with it, but its yours.
Stability and Security
Your home is a place to call your own. It is a shelter. A place that provides a feeling of comfort and stability. There’s a sense of community when you plant your roots and create strong ties with family, friends and neighbors.
Because You Own it, it’s Yours
It’s your home. You aren’t renting. You can do what you want with it. Home renovations are open to you. Install different flooring, put in new windows, buy a pool. You’re only limited by budget, building codes, and, possibly, home owner’s association.
Ownership can be Cheaper Than Renting
When you buy a home, you decide what you can afford and how much you want to put down. Most people finance their home and have a monthly payment. If you have a fixed-rate mortgage, then your principal and interest payments never go up. Furthermore, over the life of the loan, the amount that you pay in monthly interest will decrease as you pay down the loan. On the other hand, the market level for rental payments typically increases year over year.
Homeownership Builds Wealth
“Homeownership plays a pivotal role in the U.S. economy and has historically been one of the primary sources of wealth accumulation for middle class families,” – Lawrence Yun, NAR Chief Economist
Look at the Buy versus Rent example provided in Step 1: SHOULD YOU BUY A HOME IN California? of this series.
In that example, it showed that renting this home in Avondale, California would result in rent payments of close to $70,000 over 5 years with no return and no wealth creation. However, if you bought the same home, with a purchase price of $154,600, your mortgage payments over 5 years would likely be a little less (yes, owning can be cheaper than renting). However, you would have over $52,000 in equity. That is your money! Plus, in that example, owning the home resulted in an additional $11,000 in tax deductions.
With that said, it is likely that either you or someone you know lost their home – or their equity – in the past decade’s financial crisis. Many people learned that home values don’t always go up. Home values fluctuate. Nevertheless, most people agree that, even when adjusting for inflation, home values increase to over time.
Even if you believe you can’t count on appreciation, you can still think of your home as a forced long-term savings plan. When you pay your mortgage every month, a portion of the payment reduces the amount that you owe. This monthly reduction of your mortgage increases your equity. Eventually, you should be able to pay off your home and you will no longer have a mortgage payment.
Home Ownership Has Tax Benefits
Buyers should speak to their personal CPA or tax advisor if they want to know what the tax advantages are of owning a home.
Here are a short list of benefits you can inquire about:
Mortgage Interest Deduction: Typically, you are allowed to deduct mortgage interest from your taxes. Points may be paid onto your interest rate, and deducted from your taxes as well.
If a buyer chooses to obtain a loan against their home to do home improvements,
Finally, if later on you choose to obtain a loan against your home to do home improvements, the interest on that loan may be deductible too.
Property Taxes: To avoid double taxation, property taxes that you pay on your home is typically fully deductible from your federal income taxes.
Home Office Deduction: If you use a portion of the home exclusively for an office for your work or small business, you may be able to deduct certain home expenses from your taxes.
Capital Gains Exclusion: If, after living in your home for two years (two out of the last five to be precise), you sell your house for a gain, you may be able to keep the profits as tax-free income. There are restrictions that apply, but they are fairly generous to the average American.
Other Limited Benefits: There are a few other tax benefits for which you may be eligible depending on where you live, how you bought your home, if you have private mortgage insurance or if your house has certain energy-saving systems (ex. solar panels). These benefits are often restricted and/or temporary so you need to do your homework.
You can find Tax Information for Homeowners from the IRS here.
Legal Disclaimer
This home buyer series is intended to provide general information regarding the process of how to buy a house in California. It is not intended to provide buyers with legal, accounting or financial advice. You are advised to seek the services of a skilled professional this those fields.
Additionally, this home buyer series does not set forth all qualification criteria for any of the loans described herein; all interested persons must successfully meet qualification criteria and complete the application process to obtain such loans.