1. Build home equity
When you own your home instead of renting, you build home equity. Equity is the difference between the value of your home and the outstanding mortgage balance. In other words, it represents the portion of a property's value that the homeowner owns outright, without any debt or mortgage obligations.
Usually, your mortgage payment is split between interest and principal payments. Initially, a large portion of the payment goes towards interest. Gradually, more of your monthly mortgage payment covers the principal. As you pay down your principal and your home value appreciates, your home equity increases.
Moreover, home equity is a valuable household asset that homeowners use to finance various projects. For instance, you can utilize it as collateral for a home equity line of credit or loan for home improvements or other expenses. Tapping your home equity is a significant advantage of owning a home instead of renting.
2. Control over housing expenses
When you have a fixed-rate mortgage, your monthly payment stays the same throughout the loan term. Therefore, you pay the same monthly fee for the home loan duration. This provides stability and predictability in your monthly budget. In contrast, rent payments can increase over time. Renters are usually at the mercy of the landlord's pricing decisions and market fluctuations.
3. Tax benefits
One of the most significant financial benefits of owning a home is the mortgage interest and property tax deductions—if you itemize your deductions. Homeowners can deduct the interest paid on their mortgage from their taxable income. The Tax Cuts and Jobs Act (TCJA) provides a deduction of up to $750,000 on interest paid for a first or second home and up to $1 million for mortgages effected before Dec. 15, 2017. This deduction provides substantial savings on your tax bill, particularly in the early years of your mortgage when most of your payment goes towards interest.
Homeowners can also reduce taxable income by deducting property taxes paid on their homes. This deduction caps at $10,000 per year on state and local taxes. Also, if you use a portion of your home as a home office, you can take advantage of the home office deduction. It allows homeowners to deduct a portion of their home expenses, such as mortgage interest, property taxes, utilities, and repairs if they use a portion of their home regularly and exclusively for business purposes.
If you own your home, you enjoy the capital gains exclusion from taxable income. Homeowners can exclude up to $250,000 ($500,000 for married couples filing jointly) from their taxable income of the capital gain from the sale of their primary residence. The house must have been their primary residence in two of the past five years, and they should not have claimed capital gains exclusion for another sale in the previous two years.
Finally, homeowners can receive tax credits for certain energy-efficient home improvements, such as installing solar panels, insulation, or energy-efficient windows. These tax credits help offset the cost of these upgrades and provide additional savings on your tax bill. Be sure to consult your tax advisor.
4. Control and freedom to customize
Homeowners have the freedom to create a space they can call their own. Unlike renters, they can modify their homes to suit their preferences and needs. This freedom can range from simple changes, such as painting the walls or changing the flooring, to more significant renovations, such as installing a swimming pool or adding a room. This ability to make a house a home is one of the most rewarding aspects of homeownership.
Customizing your home allows you to create a living space that meets your unique needs and style and adds value to your home. If you own your home, you can create outdoor living spaces that provide a beautiful and relaxing environment to enjoy with family and friends. For instance, creating an outdoor kitchen, building a deck or patio, or installing a fire pit or outdoor lighting. These outdoor living spaces add value to your home and increase your enjoyment of your property. Also, upgrades, such as kitchen and bathroom renovations, can significantly increase your home's value.
Another advantage of owning a home is total control. You only need to follow homeowners association (HOA) rules (if you have one) and codified laws. No more restrictions on pets, gardening or any other limitations that landlords place.
5. Sense of community
When you own a home and intend to stay in that neighborhood over the long term, you're more likely to invest in your community by participating in local events, civic engagement and supporting local businesses. You'll also build your social network and develop lasting relationships as you get to know your neighbors.
6. Opportunity for income generation
Owning a home can provide opportunities for income generation for homeowners. One of the most common ways to generate income is to rent out a portion of the property. You may rent out a room, an apartment above a garage or a separate living space within the home. Renting out a portion of your property can provide a steady source of income to offset mortgage payments or other household expenses.
Homeowners can also generate income by using their property for vacation rentals. With the rise of platforms such as Airbnb and VRBO, renting out your home or a section of your property to vacationers is convenient. Short-stay rentals can be a lucrative source of income, particularly in popular vacation destinations or during peak tourist seasons.
7. Long-term investment
Buying a home as a long-term investment can yield an excellent return on investment. While there may be short-term fluctuations in the real estate market, home values tend to appreciate over the long term. According to the St. Louis Fed, the median price of houses sold rose from $23,900 in 1970 to $467,700 in the fourth quarter of 2022. You will likely profit from the sale if you buy and hold for a considerable period.
8. Improves credit score
When you make consistent, on-time mortgage payments, your credit score improves, making it easier to obtain credit in the future. Timely and regular mortgage payments positively impact your credit score because a consistent payment history shows lenders that you are a responsible borrower.
Also, homeownership strengthens your credit history by increasing your credit mix. Since credit mix accounts for 10% of your overall credit score, having various credit types, such as a mortgage, car loan and credit cards, can show lenders that you can handle different types of credit.
9. Forced savings
Homeownership provides a form of forced savings. When you make a mortgage payment, a portion goes toward paying down the loan's principal balance. You build equity in your home and increase your net worth, even if you're not actively saving money. Essentially, you are improving your financial stability since you can tap your home equity later.
10. Pride of ownership
Finally, owning a home brings a sense of pride in ownership. You have a tangible asset you are proud of and can create a living space that reflects your personality and lifestyle. Such an accomplishment can provide emotional benefits like increased happiness and well-being.
In closing, there are numerous benefits to home ownership, both emotional and financial. Monetarily, the related tax deductions and benefits can provide huge savings on your tax bill. Tax savings and other benefits, such as a sense of stability and security, the freedom to modify and the potential for building equity and generating income, make homeownership appealing to many Americans.
