You've probably listened to the advice of friends, family, and co-workers, many of whom are likely encouraging you to buy a home. However, you may still wonder whether buying a home is the right thing for you to do.
Having reservations is normal. The more you know about why you should buy a home, the less scary the entire process will be. It's reasonable to double-check yourself, though. Here are eight good reasons why you should consider buying a home.
- Buying a home is a big decision, but there are many reasons why you should consider it.
- The pride of ownership, home value appreciation, mortgage interest deductions, and potential property tax deductions are a few of the best reasons.
- Other benefits include the capital gains exclusion, preferential tax treatment, building equity through mortgage reduction, and equity loans.
Pride of Ownership
Pride of ownership is probably the number-one reason that people enjoy owning their own homes. It means you can paint the walls any color you desire, turn your music up, attach permanent fixtures, and decorate your home according to your own taste.
Homeownership also gives you and your family a sense of stability and security. It's investing in your future—equity that will grow with you the longer you are in the home.
Beyond pride of ownership, it's important to realize another benefit. Although real estate values move in cycles, housing values have consistently appreciated. The Federal Housing Finance Agency tracks the movements of single-family home values across the country. Its House Price Index breaks down the changes by region and metropolitan area, and you can track how home values have increased over time.
Many people view their home investment as a hedge against inflation.
Mortgage Interest Deductions
Homeownership is a superb tax shelter, and tax rates favor homeowners. Sometimes, the mortgage interest deduction can overshadow the desire for the pride of ownership as well. As long as your mortgage balance is smaller than the price of your home, mortgage interest is fully deductible on your tax return. For a large portion of the time you pay down your mortgage, interest is the largest component of your mortgage payment.
Property Tax Deductions
IRS Publication 530 contains tax information for first-time homebuyers. In general, you can deduct state and local real estate taxes. Most homeowners pay their property taxes as part of their monthly mortgage payments.
To take advantage of the interest and property tax deductions, you must itemize your deductions. With the higher standard deduction that went into effect under the 2017 Tax Cuts and Jobs Act, homeowners may find the standard deduction more advantageous.
Capital Gains Exclusion
You must meet both the ownership and use test (from the tax code). You must have used and lived in the home (as your main residence) for at least two years out of the five years before the date of the sale. The use test and the ownership test don't have to be during the same two years. However, both have to be within the five-year period.
Preferential Tax Treatment
If you receive more profit than the allowable exclusion upon sale of your home, that profit will be considered capital gains as long as you own your home for more than one year. Capital gains receive preferential tax treatment compared to income tax. This means that even if your profit exceeds the exclusion, the taxable portion will be much less than you might imagine.
Most taxpayers will pay 15%, or at most 20%, in capital gains taxes. That's compared to the income tax rate, which is 22% or more for most taxpayers.
Mortgage Reduction Builds Equity
Each month, part of your monthly payment is applied to your loan's principal balance, which reduces your obligation. The way amortization works, more of your payment goes toward the principal, and less to interest each month. The amount of your payment going toward the principal is the lowest on your first payment and highest on your last payment. The longer you are in the home, the more equity you are building with each payment.
Consumers who carry credit card balances cannot deduct the interest paid, which can cost as much as 18% to 22%. Equity loan interest is often much less. For many homeowners who have built up some equity, it makes sense to pay off consumer debt with a home equity loan.
While in the past, you could deduct the interest paid on home equity loans on your taxes, the Tax Cuts and Jobs Act of 2017 suspended the deduction unless you use the funds to buy, build, or substantially improve the home that secures the loan. Some state laws restrict home equity loans.
The Bottom Line
Home ownership brings many responsibilities, and it's wise to make sure you're ready before you buy for the first time. But as you can see, it has a lot of benefits. Be sure to weigh the pros and cons when you're considering buying your first home.
Frequently Asked Questions (FAQs)
How do you buy a home with no down payment?
You can buy a home with no down payment if you qualify for a VA or USDA loan. For a VA loan, you must meet service requirements along with lender 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 to buy a home varies by lender and by loan type. FHA loans have a minimum credit score requirement of 500, but lenders may require a higher score. VA loans don't have a minimum score requirement, but lenders typically look for a score of 620 or higher. Lenders look for a score of 580 or higher for a USDA loan, and a score of 620 or higher for a conventional loan.