The Powerful Financial Benefits of Buying / Owning a House
Do you realize all the ways that owning a home of your own will dramatically improve your financial wellbeing and open up options and possibilities that the majority of renters never come close to realizing? Making the decision to buy a home is the single best choice you can make to enhance and expand your net worth and provide a secured financial future for you and your family.
“Homeownership appears to help borrowers accumulate housing and non-housing wealth in a variety of ways, with tax advantages, greater financial flexibility due to secured borrowing, built-in ‘default’ savings with mortgage amortization and nominally fixed payments, and the potential to lower home maintenance costs through sweat equity.”
- according to Laurie S Goodman and Christopher Mayer of the Urban Land Institute, in their research paper Home Ownership and the American Dream.
Let's look at the major financial benefits buying a house...
Leverage in terms of a financial investment exists when some, most, or all of the money used to control the investment is borrowed - in the case of most owner-occupied homes, this borrowed money comes in the form of a mortgage from a bank or other lending institution, or less commonly by private individuals.
Leverage occurs when some, most or all of an investment (in this case a residential property) is financed with the use of a mortgage. While borrowing money always comes with a cost i.e. interest. When this borrowed money is used to purchase a home it can become the most powerful financial windfall of your life. Let's look at an example of what buying a home with leverage from a mortgage and how that may benefit you in just 1 year's time.
Examples of Leveraging
Consider a 10% down payment — no you don't need 20%, 10% or even 1% down in order to buy a home but we will use 10% as an example to show you how to use OPM "Other People's Money" to leverage. That's $50,000.00 on a $500,000.00 property. By putting down only 10% of the purchase price and borrowing the rest, you essentially use a relatively small percentage of your own assets to in order to buy the home. With the majority of the money coming from the lender. This is where the phrase Other People's Money or OPM comes from.
Let's assume the property appreciates at a rate of 5% per year. This means the home buyer's net worth grows to $525,000 in just 12 months based on your $50,000.00 initial down payment your ROI "Return on Investment" is 50%.
How to calculate ROI - return on investment
To further demonstrate the different potential leverage let's look at a 5% down mortgage. Assuming the same market conditions with a lower down payment you would have the same exact $25,000.00 profit however, you do not have the same ROI. Let's compare this return on investment to one from a purchase made with only 5% down, which will help to highlight the value of leverage.
Because you have only put down half as much 5% or $25,000.00 instead of 10% as above your leverage has doubled by using only half as much of your own money and instead utilizing more of the banks. So instead of an ROI of 50% its now 100% you have doubled your initial down payment. Over time, the PROPER use of leverage can have a very significant and extremely positive impact on your net worth.
Yes, it is true that leverage works both ways if instead of property values going up 5% in a year they had gone down by 5% then your ROI would have been negative; you would have lost 50% or 100% of your down payment. However while declines do happen the value of real estate has outpaced inflation over time. Even so, as a rule of thumb you should never purchase real estate you can't or know you don't want to hold onto for at least 3 years preferably 5-7 years. Doing so puts you at greater risk and also more of a speculator rather than a homeowner.
What many renters don't realize is keeping them from owning a home of their own. They hear from friends or relatives or even other real estate sites that before they can buy a home they must have a big down payment or that they must have a high credit score. Neither of these is true. So, how much money do you need to put down on a house? and will a less than perfect credit score still allow you to get a mortgage?
Renters Are Paying A Mortgage — Their Landlord's
Some people are so afraid of the notion of debt that the thought of having a mortgage loan keeps them from buying a house, and instead they continue to rent. And while they don't have a mortgage of their own, it's important to realize that unless you are living with your parents rent free, you are paying a mortgage – either yours or your landlord’s, and believe me, you are making your landlord RICH! By renting, you are providing your landlord with Multiple Streams of income which could instead have been yours!
Homes Are A Forced Savings Account
Many people would love to save more money to put away, but unfortunately, most people lack the self-discipline required to consistently put money away for their futures. When you buy a home, your mortgage can be thought of as a means of Forced Savings. A portion of each of your mortgage payments goes towards paying down the Principal of Loan which means that every month you OWN a larger and larger percentage of the property debt free; your equity in the house goes up and up. This is often referred to as Equity Build Up. Equity build up occurs when the home owner makes Principal Payments on the mortgage, which decreases the total debt and increases their equity / ownership. When you are a home owner this forced savings is there should you need to or decide to use it at some point later in life. If you are still renting, however, you receive none of this, but your landlord most certainly does, and your landlord loves you for it - all the way to the bank
IS IT TIME FOR A MOVE? SEARCH FOR LOCAL AVAILABLE HOMES
Like any market, the real estate market will go through cycles; sometimes the market will move down and other times it moves up - and occasionally the market goes sideways, not really advancing or declining. However, it is noteworthy to understand that over the years real estate has consistently appreciated over time. Home values and rents both tend to go up faster than the rate of inflation. By owning a home of your own you have some protection against inflation. This is why owning real estate is considered an inflation hedge.
Real Estate Appreciation
As already mentioned, markets go through cycles, but over time real estate values go up faster than that of inflation overall. Equity build up happens as the home owner owns a progressively larger portion of the home as they reduce the loan balance. But appreciation happens as a function of changes in the value of the home based on the market itself. Most of the information you will see online regarding how fast home values are changing looks ONLY at the national numbers. It's very important to understand that real estate is an extremely local market; homes in Northern Virginia will not be the same as homes in other parts of the U.S., just as homes in each neighborhood in Alexandria, Arlington, Fairfax, Prince William County or Falls Church City are likely going up at different rates from each other. So, home owners that want to know the present accurate value their property should never rely on these national numbers. You need to get local information from a real estate professional that is familiar with your local real estate values.
The financial benefits of owning real estate are significant, but they may actually be much less important to your life than the possibly more positive non-monetary advantages. Take a look at some of them HERE Non-financial benefits of a home.
Tax Deduction On Mortgage Interest
Home ownership is a superb tax shelter, and our tax rates favor homeowners. At the time of this post the current federal tax rules permit homeowners to deduct from their income taxes interest expenses on up to $750,000 of mortgage debt . While this CAP does exclude interest on mortgage debt at about the $750,000.00 threshold, this is still well above the amount that the majority of home buyers in the Northern Virginia area will need in order to purchase their homes.
This deduction is a powerful tool and benefit for home owners as interest is typically the largest component of your mortgage payment, at least during the beginning of the mortgage. Because a mortgage is most often an amortized loan the interest portion of the payment is highest at the beginning of the loan's term and declines gradually through the life of the loan.
Tax-Free Capital Gains
At one time there was a capital gain tax exclusion for individuals that owned a home, were at least 55 years of age, and met other conditions; however, many people are unaware that this one-time exclusion no longer exists. It ended in 1997, which is great news for everyone because it was replaced by an exclusion that can be used by Everyone, every 24 months. As long as you have lived in your home for two of the past five years, you can exclude up to $250,000 for an individual or $500,000 for a married couple of profit from capital gains. You do not have to buy a replacement home or move up. You can exclude the above thresholds from taxes every 24 months, which means you could sell every two years and pocket your profit within the above mentioned limits completely tax free.
Preferential Tax Treatment
If you receive more profit than the allowable exclusion upon the sale of your home, that profit will be considered a capital asset as long as you owned your home for more than one year. Capital assets receive preferential tax treatment. This means even if your profit is in excess of the exclusion, the taxable portion will be much less than that of ordinary income.
Powerful Retirement Fund With Special Advantages
When you correctly include real estate as part of your retirement fund you open up some options that give you reliable monthly income, a windfall of tax-free profit, or both. Real estate can give the benefits of an IRA or 401K, but there are no limits to how much you can invest.
If you only own your own home but no investment properties, your home can still provide you with a number of potential options to help fund your retirement.
One option that can be considered is that many home owners, as they near retirement age, have often traded up from entry-level priced homes to higher move-up homes. Often these homes are now larger than they need or really want to take care of in retirement. So one option would be to sell their move-up home and downsize to something smaller, more manageable, and less expensive. Doing so would not only free up monthly costs by lower utilities, property taxes, and maintenance costs, but while not strictly a financial issue, possibly most important of all, less time spent with household care and chores. Additionally, downsizing will likely provide a substantial and tax-free pile of money to spend or invest as you see fit - perhaps investing some of it in a rental property to provide you with a steady monthly income as well as potential equity build up and appreciation. Locations like those here in the Northern VA area experience consistent and higher than average appreciation of real estate as well as increases in rental fees.
Another option that is growing in popularity is to utilize a reverse mortgage. The advantage of a reverse mortgage is that you are able to remain in your current home without downsizing, and you can draw down against your home's equity on either a monthly basis, in a lump sum, or both. Reverse mortgages do not require monthly payments by the home owner to repay them; however, the reverse mortgage matures - that is, it becomes payable in full in any of the following circumstances.
- The home is sold.
- All of the borrowers either move out of the home or pass away.
- The loan goes into default through a borrower’s failure to pay property taxes and homeowner’s insurance and comply with all of the loan terms.
What Reverse Mortgage Lenders Don't Say On TV
- Reverse mortgages are expensive.
- The interest rate is much higher than on a typical fixed-rate mortgage.
- Upfront fees are high, often amounting to about 10% of the total they let you borrow.
- All outstanding liens on the property must be paid or rolled into the amount you owe to the reverse mortgage lender.
- They limit the total amount you can borrow to less than 50% of the home's value.
So, make sure you clearly understand all the loan terms in order to avoid causing the mortgage to become due, as this could force the sale of your home when you are not ready for that. It is highly advisable to consult with an attorney that is fully competent and experienced with reverse mortgages and let them review the paperwork before you sign it.
Locked-In Housing Cost
You've probably heard the saying, "There is no such thing as a sure thing," or "...in this world nothing can be said to be certain, except death and taxes,” which is usually credited to Benjamin Franklin from a letter he wrote in 1789. I would humbly submit that another sure thing is that rents go up, and if you live in the Northern Virginia Metro region, whether you are in Alexandria, Arlington, Fairfax, Falls Church or Prince William County they almost certainly are the largest and go up faster than any other portion of your monthly expenses.
Christina Boyle, a Senior Vice President and Head of Single-Family Sales & Relationship Management at Freddie Mac, explains another benefit of securing a mortgage vs. paying rent:
“With a 30-year fixed rate mortgage, you’ll have the certainty & stability of knowing what your mortgage payment will be for the next 30 years – unlike rents which will continue to rise over the next three decades.”
While there are some portions of your monthly mortgage and housing expense that will go up over time, such as utilities, property taxes etc., these are only a fraction of your housing cost.
Just imagine how much extra money you will have over the next 5, 10, or 20 years if your housing costs are locked in instead of having rent go up year after year after year and building absolutely no equity - just an ever-increasing cost. Let's look at what your monthly rent will look like in the future if we assume your current rent is $2000.00, $2500.00 or $3000.00 per month and that rents only go up at a very modest rate of 3% each year
Be aware that rents in Northern Virginia usually go up faster than just 3% per year, so using 3% is an extremely conservative estimate. If you continue to rent, your rent will most likely go up faster than the chart estimates. Based on a starting rent of $2500.00 In just 5 years time you will have paid an Extra $14,052 and in 10 years time that amount soars to $54,240 just in rent increases provided they only go up 3% per year and also by the end of that 10 year period you are paying more than 33% more to rent and that is more than $10,000.00 more per year.
Additional Current Financial Benefit: Super Low Mortgage Rates
Right now, 15-year and 30-year fixed mortgage rates are at nearly all-time lows. Recently, 30- and 15- year mortgage rates have been below 4% on a fixed-rate loan, which gives home buyers, whether they are buying a starter home, move-up house or a high-end luxury property, an incredible opportunity to lock in great rates for as long as they own the home - even though home prices are higher throughout N. VA, including the close-in areas of Alexandria, Arlington, Fairfax, Falls Church as well as Prince William County. Because mortgage interest rates have fallen, it's possible to buy the same home now as a year ago and have your monthly payment actually be lower. This presents those ready to buy now with a tremendous opportunity to Buy a home today for less money.
"Financial Benefits of Buying & Owning a Home"
is brought to you courtesy of Dave Martin Realty Group, your Northern Virginia residential real estate experts. If you're considering selling or buying a house in the Northern Virginia metro area, we'd love an opportunity to earn your business, provide you an outstanding experience, and demonstrate to you that:
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