10 Reasons for Taking Out a House Mortgage
There are many great advantages of owning a home, but, frankly, some go unappreciated or underreported.
If you’re a first-time home buyer, it’s important for you to understand these advantages, sooner than later.
Sure, we understand what it means to have and own a place of our own and not to be under the thumb of a landlord telling us when or how loud we can play or music.
But besides the social privileges and freedom a home embodies, it also represents a very real material asset that can help fuel future dreams and aspirations.
For that reason, let’s take a fresh look at 10 of these advantages, including those that may not be on your radar:
1. Tax benefits
As a homeowner, you get to deduct both mortgage interest (up to $1 million) and property taxes from your annual income taxes.
If you’re a new homeowner, you enjoy even more benefits because most of the money you pay on your mortgage goes to interest.
Top earners have the most to gain from these tax advantages.
For example, if you’re in the top tax bracket (39.6 percent), every dollar you pay in mortgage interest saves you 39.6 cents in federal income taxes. You save on state income taxes, too.
The government is subsidizing your purchase.
2. Price appreciation
Houses generally go up in value over time. For example, according to the Price-Shiller Index, the price of existing homes increased 3.4% annually from 1987 to 2009, on average.
That annual percentage rate may not seem like a lot, given the popular S&P index of 500 stocks shot up about 30 percent in a year. But 3.4 percent annually over 30 years is a big deal.
After 30 years, a $200,000 becomes a $545,313 house. That’s a 172.7% increase. A $500,000 house today at an annual appreciation rate of 3.4 percent interest rate becomes a $1,363,283 house in 2044.
3. Inflation hedge
Housing costs and rents tend to outpace the rate of inflation. Although the Federal Reserve has kept U.S. interest rates artificially low, inflation will break out sooner or later, making it more expensive to make all kinds of purchases, including homes.
Ask yourself why so many investors are buying houses in the United States. Housing is a hard asset that protects investment dollars in the long run.
4. Credit builder
Payment history on your debts makes up the largest portion (35 percent) of your FICO score, which financial institutions use to determine the amount, rate and terms for loaning you money.
If you continue to make your full mortgage payment on time, your FICO should go up. As you reduce your mortgage loan balance, your FICO should incrementally rise as well, as 30 percent of your FICO is tied to how much you owe.
Conversely, late payments will ding your FICO score. For example, a mortgage payment 30 days past due could drop your score of 720 to between 630 and 650. So, pay up and on time and your FICO will increase, making it possible to finance future purchases at favorable rates.
5. Equity builder
Equity is the portion of the house that the owner has already paid off, or the difference between the home’s value and the owner’s total debt to the mortgage lender.
So, if you put down 20 percent and financed the rest through your lender, your starting equity would be 20 percent. With each loan payment, your home equity would grow and give you more borrowing and purchasing power, as noted below.
6. Borrowing power
More home equity means the chance to borrow more money with a second mortgage in the form of a home equity loan or a home equity line of credit.
These loans provide money for funding home improvements, paying medical bills, funding a child’s education or buying consumer goods like a new car, boat or RV.
7. Move-up power
Home equity also allows the owner to profit more from selling the home and apply that money toward a new house.
Equity buildup and appreciation in a first home help in the move-up to a second.
According to the National Association of Realtors, first-time home buyers’ median down payment is 3 percent; repeat buyers, meanwhile, put down 22 percent.
8. Owning a home can act as a personal finance management tool
Especially with a fixed-rated amortized mortgage, you know exactly what your payments will be over the life of your loan. Knowing your fixed costs each month, makes it easier to budget, plan and invest for the future.
9. Easy savings plan
By paying your mortgage every month, you’ve embarked on a forced savings plan. If you want to supercharge that savings plan, simply add an amount that exceeds your combined monthly principal, interest, taxes and insurance payment.
For example, on a $220,000 30-year mortgage with a 4 percent interest rate, if you were to make an extra house payment each quarter, you’ll save $65,000 in interest and retire your loan 11 years early.
If you make one extra payment each year, 13 payments annually instead of the usual 12, you’ll shorten the term of your mortgage by four years and save $24,000.
10. Capital gains
How do you spell relief? According to the Taxpayer Relief Act of 1997, you spell relief by exempting homeowners from paying any capital gains tax on the first $250,000 of gain if you’re single, and $500,000 of gain if you’re married, provided you have lived in the residence two of the last five years.
You can take advantage of this exemption every two years. By contrast, capital gains tax on stocks is 15 percent if you’re in the 25-35 percent tax bracket and 20 percent for the 39.6% tax bracket.
Put these advantages to work
Something as important and financially useful as owning a home is also worth protecting.
Therefore, set aside a rainy day fund to maintain your home and make sure your home insurance policy is sufficient to cover both damage to your property and your liability for any injuries and property damage you or members of your family cause to other people.
Lastly, treat your home as a prized asset, not as a personal piggy-bank to be raided whenever you feel the urge, but as a powerful financial instrument that should be used with great precision to help you save on taxes, hedge against inflation, enhance savings for retirement, strengthen your credit, build equity, buy more house, create more financial flexibility and command more borrowing power in the event you need it or want to leverage it to create additional wealth.
Well-known or otherwise, there are ample advantages of owning a home, especially when you’re in charge of putting these advantages to their best and highest use.
Peter is a staff writer at MyBankTracker.com who covers banking, personal finance, investing and homeownership.