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Pros and Cons of Buying a Home: We've already discussed some advantages of buying a home. List the advantages of buying you already know: Many of the advantages of home ownership have to do with your feelings - pride of ownership; freedom to decorate, landscape and maintain the place to your tastes; security and independence. All of these are aspects of control - your control over the property in which you live. But the biggest advantage of home ownership might be financial. There are several financial advantages including equity; tax deduction for mortgage, interest and property tax deductions.
Another way in which buyers increase their equity is through paying off their debt on the house. Most people do not buy their homes with cash. Instead, they take out a mortgage (debt) on the house. Generally, they make a payment on the mortgage each month, similar to the payments make. With home ownership, though, part of that monthly payment goes toward paying down the debt. As they pay down the debt, buyers gain more equity in their home. Tax benefits are the other advantage of home ownership. In Lesson 6, we will discuss the cost of borrowing money to buy a home. That cost is "mortgage interest" - the money you pay for the use of someone else's money (usually a financial institution's) when you borrow funds to buy a house. Although mortgage interest is a large part of your housing payment, you can deduct this interest from your taxable income on your federal income tax return and (in some states) on your state income tax return. This can save you a fairly substantial amount of income tax. In addition, you will pay property taxes on a home that you own. Those property taxes are also deductible from taxable income on your federal income tax return and some state income tax returns, and thus offer you additional income tax savings. How much can these tax benefits save? Go to the Washington Mutual Home Loans site to calculate the tax benefits for these two buyers, using the following information about mortgage and tax costs (use all of the figures provided: we'll explain terms we haven't discussed, such as "discount points," in Lesson 6). Be sure to plug in the figures under the "options" tab first; then click on the "Results" tab. From there, click on the "Explanation tab," and click on deduct mortgage interest and various costs and benefits (they are underlined and highlighted). This will give you a full explanation of the mortgage interest and property tax deductions and of how the calculator figures the tax savings.
How much money will Maria save each year through the mortgage interest and property tax deductions? Frankie? How are mortgage interest and property taxes deducted on an income tax return? Why does Maria save more in taxes on her home ownership than Frankie? |
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Building up financial equity in a home is one benefit of home ownership. Since most homes increase in value over time, the owner's equity increases. For example, if you buy a home for $l80,000 and its market value increases to $200,000 in three years, the difference of $20,000 is an increase in your owner's equity. Of course, the housing market (and economic conditions) vary, so, like any investment, there is no guaranteed return.
