Home ownership makes sense for millennials for an assortment of social and family reasons. It also makes sense financially, both in the short and long-term. We have compiled 7 reasons to buy a house for financial benefits (plus a few credit score bonuses) as of April 2019:
1) Tax Deductions and Benefits
Home ownership comes in the form of your tax bill – both from property taxes and mortgage interest payments that you will pay. These two items are generally large, and they usually are deductible providing tax benefits to support owning your home. Homeowners are able to deduct mortgage interest and property taxes from income tax liability. On top of this, capital gains up to $250,000 are excluded from income for single filers and up to $500,000 for married couples if a home is sold and there is a significant capital gain.
2) Gift Tax Limitations
Your parents who are married and file a joint return can gift up to $30,000 per child for a mortgage down payment, without incurring the gift tax. Another family member, such as grandparent or aunt, could gift up to $15,000 before the gift tax applies.
3) History of Equity
History of equity value is tracked month by month as you pay down the mortgage and increase your equity. Over a lifetime, home ownership helps you build wealth as your equity increases.
4) Establish Roots in Your Community
Homeownership allows you to put down roots and invest in your community when you buy a home. Although it’s better to rent if you won’t be staying long or if your plans are uncertain, that kind of flexibility comes with a price. It’s harder to feel established in a neighborhood if you aren’t a homeowner.
5) Leverage Your Equity
Housing is typically the one leveraged investment available. Few households are interested in borrowing money to buy stocks and bonds and few lenders are willing to lend them the money. As a result, homeownership allows households to amplify any appreciation on the value of their homes by a leverage factor. Even a hefty 20 percent down payment results in a leverage factor of five so that every percentage point rise in the value of the home is a 5 percent return on their equity.
6) Pay Yourself First
You are paying for housing whether you own or rent. Homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord’s. Put another way, you can think of home ownership as paying yourself — or paying someone else for the opportunity to put a roof over your head.
7) Your Home is a Hedge Against Inflation
Owning is both a form of forced savings and hedge against inflation. Since many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings to another day. Home ownership is also a hedge against inflation. Housing costs and rents have tended over most time periods to go up at or higher than the rate of inflation, making owning an attractive proposition.
Buying a house can improve your credit score, especially if you don’t have a long credit history or many installment accounts. That’s because your mortgage – provided it’s managed well — helps drive up your credit score in three ways:
- Consistent payments show you’re a responsible borrower
- Credit bureaus often give more weight to a mortgage payment history than to revolving accounts like credit cards
- Few landlords report rental payments, so your mortgage gives you an extra account on your credit report
As a first-time home owner, the process of buying a house often involves financial strain. It is a challenge to come up with a down payment and cope with unexpected homeownership costs. But as you get through the first couple years, it will get easier and you will start to see the reasons to buy a house for financial benefits. If you have a question on any of these benefits, please contact a tax professional or contact us.