Importance of Homeownership For Your Financial Plan
Owning a house is a coveted American dream. You have a place to live in and an incomparable peace of mind. The rate of homeownership in the U.S. increased to 65.30 percent in the first quarter of 2020. However, the benefits of owning a house have always been debatable. Understandably, it is a huge investment which majorly affects your financial plan. But homeownership has its unique monetary benefits too. And these are unparalleled with other investments. It has both short-term and long-term rewards. Most of all, it is a great asset for retirement.
There are many benefits to owning a house for your financial plan. Some of which have been explicitly explained below:
- Long-term asset
- Tax benefits
- Capital gain tax exclusions
- Enhances creditworthiness
- Offsets renting
A house has always been considered a safe and viable investment. Even though a part of the new generation contradicts the idea, the benefits of house ownership cannot fade. It is a secure, long-term asset, the value of which appreciates with time. However, homeowners should be patient and not expect prices to flare up in the short-term. That said, the value of the construction might depreciate but the land holding the structure increases in worth in the long-term. Thus, a house functions as a reliable asset in your financial plan. One on which you can rely when all sources of income fail to provide support. As per the Federal Reserve Board’s Household Balance Sheet, in 2019, the approximate value of the residential land was $10.78 trillion. This is a 2.8 percent rise from 2018. Moreover, the price of houses sold in the U.S. saw a 10% increase from 2014-2019.
It is essential to note that the locality, amenities, neighborhood, parks, and other factors hugely influence a home's market value. As per the Federal Housing Finance Agency (FHFA), the prices of real estate in the U.S. increased by 32.88 percent over five years until 2019. But in the Middle Atlantic, the prices rose only by 23.32 percent, while in Pacific the rates went up averagely by 40.39 percent. The difference in house property value is significantly due to the location.
Homeownership provides a lot of tax advantages. For instance, as per the tax code, a person is allowed to file for tax exemption, an amount equivalent to the mortgage interest paid. This is very beneficial, particularly in the early years of owning a home. Apart from this, the Internal Revenue Service (IRS) also allows the homeowner to claim the origination fees on a home loan, irrespective of whether it is borne by the seller or you. The origination fee is charged at the time of processing of the loan and is usually between 0.5 to 1 percent on the mortgage loans in the U.S. Additionally, the property taxes paid by the owner for the primary house and a vacation home are fully exempted in income tax calculations. Interest paid on home equity loans, or line of credit is also deductible. This tax advantage can be utilized more effectively by transferring your credit card bills to the home equity loan for a lower interest. The money saved from taxes can be used to fund other assets of your financial plan.
A house owner does get not only tax benefits but also a substantial capital gain advantage. As per the law, a single homeowner can keep tax-free profits/capital gains earned from the sale of the house, subject to a maximum of $250,000. On the other hand, a married couple selling the property for a profit can keep up a tax-free profit of up to $500,000. No capital gain taxes are paid by either the single owner or the married couple up to the upper limit. But, the capital gain exclusion is only for the primary residence and not for the secondary house. Also, the home should have been occupied by the owner for at least a minimum of 2 years before the sale. And there should not have been another profit earned from a primary house sale in the 2 years preceding the current trade.
Apart from the other benefits, an important advantage that homeownership adds to a financial plan is creditworthiness. Owning a house helps to improve the credit score and rating. It helps to add diversity to the credit profile, which is a reflection of ‘good’ debt. Buying a house speaks of commitment and sincerity, which makes a person more bankable in the eyes of the lender. It increases the financial strength and improves the credit rating of the borrower. Moreover, the credit score is hugely impacted by payment history. A strong, long, and regular payment record helps to push the score higher. However, this benefit will accrue only when you pay the mortgages on time, and there is no delayed payment. On the contrary, pending payments can have a reverse impact on the credit score. So, regularity is the only way to solidify financial worthiness.
The alternative to not buying a house is staying at a rented place. The latter might impact your financial plan since the benefits of house ownership offset renting in the long run. Typically, in a longer period, buying a house will prove cheaper than renting a place. However, in the initial years, the reality may seem opposite, and the mortgages may be higher than the rent. But eventually, when the interest on the mortgage decreases, the rent will be higher in comparison. Another aspect to it is that instead of giving away rent for another person’s property, it is advisable to invest your money to build a house for yourself.
To sum it up
Many people contradict the benefits of owning a house with its disadvantages such as high upfront costs and potential depreciation. But still, the advantages prove to be substantially stronger. Moreover, a house is like a highly bankable asset that can be used in times of vulnerability. It offers a sense of security to the owner and helps provide the much-needed stability to a financial plan in the long-run. To ensure that you leverage all benefits of owning a house, you can seek professional advice from Financial Advisors.