Owning a home is still part of the American dream. Certainly, there are significant financial and tax reasons for owning a home. While you typically only make a down payment of 10% or 20% of the home’s cost, you retain all price appreciation on the home. Part of each mortgage payment builds equity in your home. In the beginning, that may only be a small portion of each payment, but significant equity can be accumulated over a period of years. Historically, homes have provided a good hedge against inflation.
There are also significant tax advantages to home ownership. Mortgage interest and property taxes can be deducted on your tax return as itemized deductions, reducing the cost of home ownership. When you sell the home, a significant amount of capital gains can be excluded from taxes. If the home was your primary residence for at least two of the preceding five years, you can exclude $250,000 of gains if you are a single taxpayer and $500,000 of gains if you are married filing a joint return.
But despite these advantages, you should still evaluate whether owning a home makes sense for your particular situation. Some factors to consider include:
How long will you live in the home?
Besides the purchase price of the home, you must pay closing costs. There are also costs involved in selling, which typically include the real estate agent’s commission. Thus, you’ll usually need to live in the home for at least five to seven years to make it a worthwhile financial decision.
Can you afford to take on the debt?
Generally, lenders prefer that your total debt payments, including your mortgage and other consumer debts, not exceed 40% of your gross income. Make sure you’re comfortable with the amount of debt you are incurring and you’ll still have enough disposable income to save for other goals, such as your retirement.
Do you have a large enough down payment?
If possible, strive to make a down payment of at least 10% to 20% of the home’s purchase price. If your down payment is less than 20%, you’ll have to pay private mortgage insurance.
Have you considered all costs?
Besides the mortgage payment and property taxes, there are other costs involved with owning a home. You’ll be responsible for all utilities, insurance, repairs, and maintenance on the home.
If you’d like to review whether it makes financial sense to own a home, please call.
Copyright © Integrated Concepts 2015. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.