The pros and cons of home ownership
If you are currently renting you will be will be familiar with the advantages and drawbacks of renting. But what are the potential pros and cons involved in owning your own home. I believe, if entered into correctly, the advantages far outweigh the disadvantages, but then again, I'm a real estate agent!
Let's focus on a couple of the benefits from the above list.
Equity:
Equity can be defined as the current value of your home minus any liens against the property. Say you buy a $300,000 home with a $15,000 down payment, i.e. a 5%. When you take possession of the property your equity in the property is 5%, the remaining 95% is owned by the bank through a lien on your property (the mortgage).
Your new home goes up in value (hopefully)and say, after three years is now worth $330,000. So now you own $330,000-$285,000 = $45,000 of equity. This comprises your initial $15,000 down payment plus the $30,000 gain in equity.
Obviously, you have been making mortgage payments during that time. However, had you been paying rent during that three-year period, you would have nothing to show for your money, just rental receipts. In addition, tax benefits help reduce the difference between rental payments and mortgage payments. See below.
What can you do with equity in your home?
The temptation, of course, is to re-finance, get your grubby little hands on all that lovely moola and spend, spend, spend . However, that would be no different from just going shopping with a credit card. Borrowing against the equity in your home still has to be paid for.
I would advise you that you should wait until you have at least 25% equity in your home before considering taking out any equity. Then you can take out 10% and still have 15% equity. It is advisable to keep a reserve against potential market changes and as seen in 2008, when property values dropped (negative equity). You need to guard against negative equity, i.e. owing more to the bank than your home is worth.
If you use the equity wisely, you will guard against negative equity. For example updating the kitchen, adding a dormer or bathroom. You may not recoup every last dollar (when and if you sell the home) but you will get to enjoy the new upgrades. Speedboats aren't much good in mid January in the Puget Sound area!
Tax benefits
• One of the major benefits of owning a home is that the interest you pay on your mortgage(s) is tax deductable up to a limit of one million dollars.
• You can deduct the interest on up to $100,000 of other debt that uses your home as security, for example, a home equity loan.
• The points you paid to reduce your mortgage interest rate are tax deductable in the first year. However, if you refinance, take a home equity loan, or a loan secured by a second home, the points are deducted over the life of the new loan.
• The money used to pay your annual property taxes can be claimed as an income tax deduction. This applies to both your principal home and any others you may own.
• And here's the big one; if you are married, have lived in your home for two of the previous five years, then the first $500,000 of profit on your home is tax free. If you are single, the first $250,000 profit is tax-free. In all cases, there is an excise tax of approximately 2% that must be paid.
Continue to Buyer's step 3. Financing my new home
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