I have recently been talking to a lot of first time home buyers who are trying to figure out whether they should buy a home or keep renting. Owning a home is the “American Dream”. What exactly are the benefits of owning over renting?
1. Mortgages are cheap!
The mortgage interest rate went up last year by one percent. Even so, at 4.5% the interest rates are still historically low! In fact, in some cases it is cheaper to own than it is to rent. Interest rates are however expected to rise up to around 6% next year [1]. Currently, the government is keeping the interest rates artificially low. They are doing this in two ways: (1) The government is keeping short-term rates near zero by targeting the federal funds rate, the rate at which banks lend money to one another overnight. (2) They are holding down long-term rates through monthly purchases of $85 billion worth of Treasuries and mortgage-backed securities. However, it was recently announced that they are going to increase the short term rates, and reduce the amount of Treasuries and mortgage-backed securities being bought. This is likely to result in an increase in interest rates.
2. You get to make your house, your home
One major benefit of owning a home, is that you get to make it your own. You can paint, hammer, add and strip all you want. Whether you need to knock down a wall to create a more open living space or redo the bathroom to reflect your tastes, when you own a house you have the freedom to do so. You want a pet? You want four pets? Go get them! No one can stop you if you own your home. Although an HOA might complain, they still can’t keep you from having pets [2]. Either way, you won’t have to worry about losing your security deposit when you customize the house or bring in your furry friends.
3. Building up equity
Having equity that can be tapped into if necessary is a huge plus for owners. Your equity in your home is the amount of money you can sell it for minus what you still owe on it. Equity is not only beneficial in case you need to pay for emergency expenses, home improvements or school tuition. Having equity makes it much easier to get a loan for almost anything else.
4. You are saving up for the future
Since homeowners have to pay their mortgage every month they are ‘forced’ to save up money. When you eventually sell your home and your mortgage is paid off, you are likely to walk away with some extra money (or in some cases a lot of money!). Of course, homeowners who face foreclosure or declining home values might find themselves without equity to show for their monthly payments).
5. Unlike rent, mortgage payments don’t go up
Fixed rate mortgages don’t go up, even if the cost of everything else does. Rents are usually adjusted annually to reflect the rate of inflation. Your fixed rate mortgage payment will stay the same. You can take out a 30 year mortgage with low interest rates and lock in a low monthly payment. You and your family will be protected against inflation. I should mention however, that if you take an ARM (adjustable rate mortgage) your payment might increase depending on the type of ARM you have selected.
6. Financial Health
Owning a home can be good for your general financial health. Here is an example of what that means:
Let’s say you buy a $350,000 house, and you put $30,000 down. This would make your mortgage payment $1621.39 for 30 years at a 4.5% interest rate. At the end of the 30 years, you own the home free and clear, and hopefully it’s appreciated significantly in value.
If you pay the same amount in rent, after 30 years, you’ll have paid a total of $583,700 in housing payments. This calculation doesn’t even consider the fact that rental rates usually rise over time, making your total even more. At the end of 30 years, you’ll have absolutely nothing to show for all of the money you spent.
So, while owning your home only provides 3%-5% annual returns on a long-term basis, this is still far better than paying out hundreds of thousands of dollars and not building any equity whatsoever. Home ownership is still the way to go!
7. Amp up your credit
Most people who buy a home have good credit, so this might seem unimportant. Regardless, a mortgage will report to credit bureaus whereas a rental company is unlikely to do so. There are few items on the credit report that demonstrate your financial stability and responsibility better than being able to pay for your mortgage. Good credit will make it easier to get a better deal when you are applying for a new car loan or a new credit card.
8. Tax Deductions
Homeowners benefit from special tax deductions. First of all you get a special homeowners exemption, lowering your property tax payment. Secondly, you can write off your property taxes and mortgage interest paid from your income tax. Third, the year you purchase your home you get to deduct the points paid to originate your mortgage as well. Fourth, certain home improvements that will make your home more ‘green’ can also be written off! At last, if you have lived in your home for two out of five years you will not have to pay capital gains tax. When you sell, you can keep profits up to $250,000 if you are single, or $500,000 if you are married,
9. You can generate a second income stream
Have you considered taking in a roommate for a while? This can provide you with a significant and steady stream of income. Some people even rent out their garages. In times of need, or any other time really, you will be able to get a few extra bucks every month.
Do you still have more questions about whether or not owning a home is the right move for you? Give Jaleesa Peluso a call at 949.395.0960. She can explain the different benefits to you. Jaleesa can also recommend a few great loan officers who can help you analyze your financial situation.
About Jaleesa Peluso
Jaleesa Peluso is a Laguna Beach Realtor®. As a Laguna Beach Realtor she specializes in coastal homes and luxury home marketing. For more information about Orange County Real Estate or Laguna Beach Real Estate, visit: www.jaleesapeluso.com
Contact: (949) 395-0960 or Jaleesa@JaleesaPeluso.com