Nicki & Karen

5 Financial Advantages of Homeownership

Nicki & Karen » January 25, 2021

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Purchasing a home is likely the largest financial decision that you’ll ever make. In order to buy a home, you will need to have a sizable down payment that’s at least 5-10 percent of the listing price, which means that you should have a substantial amount of savings before making this kind of investment. Keep in mind that most lenders prefer down payments that amount to 20 percent of the listing price or higher, which will allow you to obtain low interest rates. Homeownership is something that many people strive for as opposed to renting or living in a condo/townhouse.

Along with displaying a certain amount of financial success, owning a home comes with many tangible benefits that can’t be had with other living situations. When you purchase a single-family home, you’ll be living in a property that you control. If you want to upgrade the exterior or interiors of your home, owning the property means that you can feel free to do so without needing to ask a landlord if such upgrades are allowed. While you can purchase a home at any age, the average age that people buy their first home is around 34 years old, which is significantly higher than the average age of 29 in the ’70’s and ’80’s.

Before you purchase a home, it’s important that you know about the costs associated with homeownership. Along with the high down payment that you pay when making an offer on the property, you will also be tasked with paying many different closing costs. These costs cover title insurance, appraisals, taxes, and attorney fees. Even though the exact fees that you pay can differ, you can expect these costs to amount to 2-5 percent of the main purchase price for the home. While you can certainly rent a home, the monthly payments will assuredly be higher than what you would pay when purchasing a property. Owning a home also gives a sense of security that isn’t possible when renting. This guide offers a comprehensive look at five of the top financial benefits that come with owning a home.

Key Takeaways:

  • Purchasing a home is a huge financial decision that can deeply impact your credit.
  • There are many different closing costs associated when buying a home that you may need to look into.
  • The five financial advantages associated with homeownership we discuss below are building equity, tax deductions, control over housing costs, control of environment, and other perks.

1. Build Equity

home equity loan

Likely the most advantageous aspect of owning a home is that you will be able to build equity over time. When you make monthly payments on your mortgage, these payments will consist of four separate components, which include the principal, interest, insurance, and taxes. The principal and interest components will make up the majority of the payment. Equity refers to the difference between the total value of your property and the amount that you owe on your home. When the amount that you owe decreases, your equity in the home will go up.

There are two ways that you can build equity as a homeowner. The primary method involves making monthly payments on your mortgage, which lessens the amount that you owe and increases your overall equity. However, your equity can also go up if the value of your home increases. In many real estate markets across the country, home values have been rising steadily for more than a decade. When you own a home, the value of the property should appreciate. The value of your home can increase over time or after you make improvements to the property. For instance, remodeling the bathroom and replacing the roof are two projects that commonly add value to a home.

Keep in mind that paying your mortgage is a kind of savings since the equity in your home increases alongside these payments. It’s possible to borrow against the equity that you have in your home for medical expenses, education costs, or home improvements. By obtaining a line of credit or home equity loan, you can pay off credit card debt. These options are only available when purchasing a home. While you can also build equity in a condo, the value of a condominium doesn’t typically increase at the same rate as a single-family home.

2. Tax Deductions

Being a homeowner allows you to claim numerous tax deductions that can reduce your yearly tax burden. When you own a home, you’ll be required to pay taxes on the property. The property taxes that you pay are based on the value of your property. While it’s possible to pay these taxes once per year, many mortgage payments will automatically include the monthly property tax that you owe. The exact amount you owe changes each year to take appreciation into account.

Depending on where you live, you may be able to claim your property tax payments and interest payments as deductions on your taxes. The same is true of some of your closing costs. In the first year after you purchase your home, you can write off the mortgage points on your mortgage loan, which can help you save a significant sum of money. These points are fees that you can pay during the closing process, which will result in you obtaining a lower interest rate on the mortgage.

A single point costs exactly one percent of the total mortgage amount. If you purchase a home for $250,000, one point will cost $2,500. The points that you pay for can be used as deductions on your tax return. As long as your home is valued at less than $750,000, there are no limits on how many points can be deducted. In the year that you purchase your home, you should receive Form 1098 from your lender, which shows you how much you paid in mortgage interest and mortgage points. This amount can be transferred directly to line 10 of Schedule A for Form 1040, which is a largely straightforward process.

3. Control Over Daily Housing Costs

control over daily housing costs

Purchasing a home gives you more control over your daily housing costs compared to what it’s like when renting an apartment. When you purchase a home, the monthly payments that you make should remain the same unless you choose to refinance your mortgage. On the other hand, the rent amount that you owe can always change when you renew your lease, which can lessen the amount you can spend every month. Keep in mind that many apartments aren’t outfitted with energy-saving appliances, which means that your energy and water bills may be higher than you would prefer.

It’s possible to choose your own appliances when owning a home, which can help you save a substantial amount of money in the long run. Making financial decisions is easier when you know exactly what your monthly rent and utility bills are going to be. Whether these decisions are long-term or short-term in nature, being a homeowner can give you confidence that the decisions you make are the right ones.

4. Other Perks

Owning a home also has some additional perks that you might want to know about. For instance, having a mortgage is considered to be a type of “good debt”, which means that your credit score should increase as long as your payments are made on time. Since your credit history will include a mortgage loan, your credit-worthiness will improve, which makes it more likely that you will be approved for a line of credit or business loan in the future. Your car insurance payments may even lower as a result of the mortgage that you have.

5. Control of Your Environment

creating your living environment

Owning a home gives you more freedom and control over your environment. As a homeowner, you can create the type of living environment that matches your personality. You can paint the walls of your rooms in any color, own pets without needing to pay a fee, change the flooring whenever you want, and replace lighting fixtures without first seeking permission. In fact, you don’t need approval from anyone to make these changes, which gives you a freedom of design that isn’t possible when renting an apartment. While building permits are sometimes necessary for larger projects, remodeling your home can occur whenever you want to make substantial changes to the look and feel of your property.

Potential Risks Associated with Homeownership

Despite the numerous benefits that come with homeownership, there are also significant risks that you should be aware of before making this type of investment. The most obvious risk is that you will need to make a sizable down payment before you’re able to purchase a home. Even if the payment that you make is only 10 percent of the property value, this amounts to $10,000 on a $100,000 home or $50,000 on a $500,000 home. If your savings aren’t much higher than the down payment that you’re about to make, this type of investment could be risky.

Another major risk of owning a home involves the maintenance requirements that you must adhere to. You won’t have a landlord on hand to take care of repairing your HVAC unit or fixing a leak when it occurs. While major repairs aren’t typically needed on a regular basis, the costs associated with HVAC repairs and appliance repairs can be high. Liquidity also applies to this form of investment. When investing in a stock, it’s possible to unload the stock in a matter of hours or days. On the other hand, investing in a home doesn’t automatically give you access to high amounts of liquid assets. If you want to sell your home, it can take weeks or even months to find a buyer.

Along with the maintenance and upkeep requirements, you have additional financial responsibilities as a homeowner. If you don’t make your monthly mortgage payments on time, you risk having your home foreclosed on, which means that the equity you’ve built up would be lost. Other responsibilities include liability insurance, homeowners insurance, lawn mowing, and snow removal.

There’s also a small possibility that your home could depreciate in value over time, which means that the home would be worth less than it was when you purchased it. This commonly occurred during the housing crisis in 2008. Conditions in the local and regional economies around you can dictate what happens to the value of your home. Despite these risks, the financial benefits of homeownership can far outweigh the potential issues that occur along the way.

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