Before Buying Your First House

Tuesday, May 06 at 10:05 AM
Category: Personal Finance

Owning your own home has been part of the "American Dream" for years. The pride of ownership and sense of belonging somewhere have been strong factors in motivating over 60 percent of all households to own their own home. In addition, there can be true financial rewards of home ownership. Here are some financial considerations to be aware of as you move toward the "American Dream" of owning your own home.

Good news
If the value of the home you buy goes up, then you can profit in a leveraged way. Let us assume you buy a home for $150,000 with a $25,000 down payment and then sell the home for $175,000 (after all costs). Your cash proceeds would be $50,000, or a doubling of your actual cash investment. In other words, the home appreciated about 17 percent and you made 100 percent on your money. Remember leverage works in reverse if prices fall.

There are tax advantages with owning your home. Many homeowners are able to itemize deductions for mortgage interest and property taxes on their home. This can result in savings when you file your tax return. The IRS also allows you to defer any taxes on any gain on selling your home if you buy another more expensive home within a given period. There are also tax breaks on gains if you are over age 55 when you sell your home. Investigate these tax advantages or talk to a tax accountant to completely understand the tax advantages.

You build up equity in your home as you make mortgage payments. Every mortgage payment you make includes interest and principal repayment. Over time, the principal repayment reduces the remaining amount you owe. In the first few years, most of your payments will be interest. It is in later years that your equity build-up really takes hold. Here is a chart showing how your mortgage payments slowly convert from mostly interest to mostly principal over the life of a 30-year mortgage.

Home ownership provides financial flexibility. Your home may be the most valuable asset you own. It can serve as a reflection of your financial stability, and it can even be a source of collateral for other borrowing. With a home equity loan, you essentially are pledging the equity in your home for additional borrowing. Home equity loans can be a low cost way of consolidating any other debts you have, perhaps at a lower interest rate and possibly with some income tax benefits along the way.

Other considerations

If you plan to stay in an area only a short period of time, then renting may be economically advantageous. The costs of buying a house (realtor's commission and closing costs), moving (hiring a mover or renting a truck) and getting a mortgage (points and loan origination costs) may not pay for themselves if you’re only in town for a relatively short period of time. If the value of the home has not risen by that total when you are ready to sell, then you will end up losing money.

Conclusion
If you are like millions of others, owning your own home is a financial and lifestyle goal. The pride of ownership and the financial rewards are attractive. Just make sure you understand home ownership is the right path for yourself at this time.

Wondering what to keep in mind for you house hunt? Check out our Pinterest board for home buying tips.*

Links marked with * go to a third-party site not operated or endorsed by Arvest Bank, an FDIC-insured institution.

Tags: Financial Education, Home Loans, Mortgage
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