The Advantages of Homeownership
If you're curious about the financial benefits of owning a home, we've compiled a list of our top six favorite reasons why homeownership is superior to renting. It's important to note that everyone's situation is unique, so to learn more about the pros and cons, we encourage you to reach out to one of our Vercasa brokers to see if you are in a good position for home ownership. If you're interested in learning more about the home buying process, you can find additional information here.
1. Tax Deductions
The Tax Cuts and Jobs Act of 2017 brought about changes to the available tax deductions for homeowners. Under this bill, the deduction for state and local taxes, including property taxes, is limited to $10,000. This limit applies to both single and married filers and is not adjusted for inflation. Additionally, homeowners no longer benefit from the personal exemption.
However, despite these changes, homeowners can still reduce their tax burden through homeownership. Depending on the size of your down payment, you may be eligible to claim the points paid on your loan as a deduction. Mortgage points are fees paid at closing to the lender in exchange for a lower interest rate, effectively reducing your monthly mortgage payments.
2. Deductions on Home Equity Lines
Another advantage of homeownership is the ability to deduct the interest paid on your home equity loan. Furthermore, you have the option to consolidate your credit card debts into a home equity loan. Consolidating debt is a smart move because home equity loans and similar types of loans typically offer lower interest rates compared to those charged by credit card companies.
3. Capital Gains Exclusion
Once you have resided in your home for more than two years and decide to sell, you can exclude up to $250,000 of the profits from capital gains taxes. This exclusion amount increases to $500,000 for married couples. It's important to note that this exclusion applies to long-term gains and requires the home to have been your primary residence for at least two years.
4. Equity Growth Over Time
Depending on your life plans and goals, purchasing a home can be more cost-effective than renting. Over time, owning a home generally becomes more affordable compared to renting, especially in cities where high rental prices are comparable to mortgage payments. However, it's worth noting that in the early years of a mortgage, a significant portion of the monthly payment goes towards interest. Nevertheless, as you continue to hold onto the property for several years, the balance shifts, and more of your payment goes towards paying off the principal, allowing you to build equity. Additionally, if feasible, making extra monthly payments can accelerate the loan payoff process.
Rent, on the other hand, is subject to unpredictability over time. Tenants are at the mercy of landlords and face the possibility of yearly increases in housing costs. By owning a home, you have certainty about your mortgage payment not only in the coming months but for years to come. Moreover, you may have the opportunity to lower your costs through refinancing should it become available in the future.
5. Don't Be Afraid to Refinance
Once you have settled into your new home, remember that you are not committed solely to your mortgage interest rate, but rather to your investment. Stay informed about the latest interest rates and consider refinancing your loan if rates start to decline below what you initially paid. Refinancing can lead to significant monthly savings, whether you want to lower your payment, shorten the loan duration, access your home's equity, or consolidate debt. If you're unsure about when refinancing is appropriate for you, don't hesitate to consult with a lender.
6. Creating a Solid Financial Base
According to the National Association of Realtors, home values generally increase by 3 to 4 percent every year. The Denver average for the past 10 year has been closer to 9% (equity gain per year) though that number is slighty skewed because of the massive gains seen during the pandemic. We do expect gains here on the front range to be higher than the national average for the foreseeable future due to the following factors: Population growth, inflation, and lack of inventory.
