Why It Makes Financial Sense To Buy A House

Home ownership will always be a dream for majority of us. We seem to associate home ownership with the standard of living. Thus, some of us would feel a sense of  improvement on our living status after we bought the house. We also feel that we have a sense of financial security knowing that we own something of value. Of course, you don’t totally own it yet because more than likely that you are still carrying a mortgage. However, since the title is in our name, this pretty much means ownership. To top it off, it also comes with the following financial benefits:

Income Tax Write-Offs:
If you are looking for a tax shelter, then owning a home can be ranked one of them. When you buy a home chances are that you will be carrying a mortgage, unless you are super rich and you decide to purchase it with your cold hard cash. When it comes to the tax deduction, individuals can choose between the standard deduction and the itemized deduction, whichever is higher. Because of the high interest payments associated with a mortgage, more than likely your itemized deduction will be greater than the standard deduction. In fact, you can actually deduct the interest paid, the property taxes, and the private mortgage insurance premium. Because of this, you may be able to deduct other items that are not usually deductible because in total they normally do not exceed your standard deduction. These items are your charitable contribution, gambling losses, casualty losses, taxes such as local, state & personal property, unreimbursed employee expenses, health related expenses, etc.

Gains may not be taxable when selling the house
Another tax benefit is when selling your home. If you live in your house for at least 2 out of the last five years, then you do not have to pay taxes on the gains of your homes for up to $500,000 for married couples ($250,000 if you’re single) when you sell your house.  For example, you bought your home 10 years ago and have been living there since. If your home cost $100,000 back then and you are selling it now for $400,000, you would have a gain of $300,000. Since you qualify on the tax exclusion, then you do not have to pay taxes on that. Now, assuming that you rented instead and you invest the difference in stocks. If you withdraw cash and you’ve recognized the gains for the year, that same $300,000 capital gain will be taxed at 20%  (assuming that your marginal tax rate is higher) so your net gain would be just $240,000.

Builds Equity
Your home is considered an investment and other people actually call it a forced investment. Equity is the difference between the value of your home and how much you still owe on the house. You see, every time that you make a payment; a portion of it reduces your mortgage balance thus increasing the equity. However, in the early years of the payment, majority will be applied to the interest with only a small fraction being applied to reduce your house debt. The beauty about owning a home is that building equity is not just about how much of the monthly payment is applied towards the principal. It also involved the effect of the appreciation based on the current real estate market. You see, when real estate market picks up, your homes value and equity also increases and this can happen even if you only owned the house for a few years.

Hedge against Inflation
Inflation means that your purchasing power decreases as time passes by. A car that is worth $10,000 right now could be worth $30,000 20 years from now. You see, when you invest your money in any savings account, one of the risk that you’ll encounter is the inflation risk. However, this is not the case with your home. A home is considered as one of the hedges against inflation. When inflation increases, your homes value and equity increases as well. A home that is worth $10,000 in 1970 is already worth $300,000 right now both due to inflation and market changes.

Consolidate Debt Using Equity
Once you build equity in your house, you can actually borrow money from it and use the proceeds to pay higher interest loans, car payment, credit cards, etc. The beauty about doing it this way is that the interest is much lower than the interest rates on those loans. Also, the monthly payment may be lower due to longer term and low interest rates that enables you to free up more monthly payment that you can apply towards your retirement and other savings account. Lastly, the interest on the home equity loans may be tax deductible while personal loans (other than student loans) are not.

As A Retirement Nest Egg
As I said before, this is like an investment and some people actually treat this as retirement nest egg. Paying a mortgage is similar to forced savings. In addition, banks even offer reverse mortgages where you can still live in the house and at the same time collect monthly payments from it.

Photo Credit: Frusterio Inc

Comments

  1. Somehow I feel this article would do better in 2006. 😉

    There are some advantages to home ownership, but I think the most important thing should be: Is this a place I would enjoy living in? In the end, a home is a place to live. If we do get some inflation down the road, the inflation hedge won’t hurt, either.

  2. Thanks Ken! It’s nice to finally hear someone that isn’t bashing the housing market.

    Yes, we had a bubble, and yes that bubble burst… but people are acting like owning a house is a dumb idea, and it’s not! We are just in a rare downturn in the housing market… and if things don’t go into chaos, that market will be great again someday soon!

    For kids, having a house is even more than financial. Our house is really more for the benefit of my kids and their stability. They are fiercely proud of our house, and they have a level comfort that I didn’t’ have growing up. in 2014, your writeup will be the norm again!!!

  3. Ken G says:

    @Kevin. The article is referring to home ownership in general and not necessarily for a particular time period but you’re right on the question “if this would be a good place to live in.”

    @Money Reasons – Thank you as well. I am still a big proponent of homeownership and I agree with you that eventually the market will be back up again. Most people buy a house basing it on their “emotional” reasons and it just happens that there are “financial” benefits as well for which people can treat it as some sort of a bonus.

  4. A very interesting read, I agree that surely the housing market willl pick up again and that home ownership will once again be a good thing, I also agree that a house should be a home, as with all risks in the financial world abeit pesonal investments or business investments including private equity they should all be thoroughly reseached before making any commitments

  5. I agree that once you get to the 33% or 35% tax bracket, you’re probably best to buy a house. It makes even more sense if you are in those tax brackets and want to stay for 5+ years.