You have probably listened to the advice of friends, family, and colleagues who encourage you to buy a home. However, you may wonder if buying a home is the right choice for you. It’s natural to feel hesitant. The more you learn about the reasons to consider buying a home, the less intimidating the process becomes. But it’s reasonable to double-check yourself.
Pride of Ownership
Pride of ownership is perhaps the number one reason people enjoy owning their own homes. It means you can paint the walls whatever color you want, crank up your music, install permanent fixtures, and decorate your home according to your taste.
Appreciation
Aside from pride of ownership, it is important to recognize another benefit. While real estate values move in cycles, home values tend to increase steadily. The Federal Housing Finance Agency tracks the movements of individual home values across the country. The Home Price Index divides changes by region and urban area, allowing you to track how home values increase over time.
Mortgage Interest Deduction
Homeownership provides a great tax shelter, and tax rates favor homeowners. Sometimes, the mortgage interest deduction can also cover the desire for pride of ownership. As long as your mortgage balance is less than the price of your home, you can fully deduct mortgage interest from your tax return. During a large portion of the time you are paying off your loan, interest is the largest component of your mortgage payment.
Property Tax Deduction
IRS Publication 530 contains tax information for first-time home buyers. In general, you can deduct local and state property taxes. Most homeowners pay property taxes as part of their monthly mortgage payments.
Capital Gains Exclusion
You must meet both the ownership test and the use test (per tax law). You must have used and lived in the home (as your principal residence) for at least two of the five years prior to the sale date. The use test and the ownership test do not have to occur within the same two years. However, both must fall within the five-year period.
Preferred Tax Treatment
If you receive more profit from the allowed exclusion when selling your home, that profit will be considered capital gains as long as you have owned your home for more than one year. Capital gains receive preferred tax treatment compared to ordinary income tax. This means that even if your profit exceeds the exclusion, the taxable portion will be much lower than you might expect.
Building Mortgage Equity
Each month, a portion of your monthly payment goes toward reducing the original loan balance, decreasing your obligation. The amortization process means that more of your payment goes toward principal and less toward interest each month. The amount of your payment going toward principal is the smallest in the first payment and the largest in the last payment. The longer you are in the home, the more equity you build with each payment.
Home Equity Loans
Consumers carrying credit card debt cannot deduct the interest paid, which can cost between 18% to 22%. Interest on home equity loans is usually much lower. For many homeowners who have built up some equity, it makes sense to pay off consumer debt with a home equity loan.
Conclusion
Owning a home comes with many responsibilities, and it is wise to ensure you are ready before buying your first home. But as you can see, it has many benefits. Weigh the pros and cons when considering your first home purchase.
Questions
Frequently Asked Questions (FAQs)
How can you buy a home without a down payment?
You can buy a home without a down payment if you meet the requirements for a VA or USDA loan. For a VA loan, you must meet service requirements as well as loan requirements to qualify. For a USDA loan, you must buy a home in a designated rural area and meet income requirements.
What credit score do you need to buy a home?
The minimum credit score required to buy a home varies depending on the loan and type of loan. FHA loans have a minimum credit score requirement of 500, but lenders may require a higher credit score. There are no credit score requirements for VA loans, but lenders typically look for a score of 620 or higher. Lenders look for a score of 580 or higher for USDA loans and a score of 620 or higher for conventional loans.
Source: https://www.thebalancemoney.com/eight-reasons-to-buy-a-home-1798233
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