Owning a home comes with many benefits that aren’t available to renters. Ownership gives you the ability to use your property for tax benefits, access its equity and the freedom to design, furnish and enjoy your living space as you wish. In this blog, we will discuss how being a homeowner unlocks benefits that can save you money and improve your financial wellness.
Homeowner Tax Benefits
There are tax benefits for those who own a home, no matter if you have a mortgage or own the property outright. For those with a home loan, there are tax deductions that lower your federal tax bill each year. According to Lending Tree, the 30-year fixed mortgage is especially beneficial in the earlier years of a mortgage because most of the monthly payments go towards interest versus principal.
If you have a mortgage or have already paid off your home, you can deduct some of your property taxes. Additionally, if you borrowed from your home’s equity, you could deduct the interest you paid on the home equity loan. To know exactly what tax benefits are available to you as a homeowner, consult your tax advisor.
Home’s Value and Equity
With each payment made on your mortgage, you build equity in your home. As you pay down your principal balance, your home equity rises. This equity can eventually be used to borrow funds through a home equity loan, home equity line of credit (HELOC) or via a mortgage refinance with cash-out.
Each of these options lets you borrow money for major expenses, such as college tuition, a wedding, consolidating debt, remodeling your home and more. Home equity lending typically has lower rates than credit cards and personal loans, making this a smart and practical lending option. Here’s more information about these types of loans and some things to keep in mind:
- Home Equity Loan: A home equity loan lets you borrow from the home’s equity without affecting the existing first mortgage. Once approved, you’ll receive a lump sum of money and repay it over a set term. Interest rates on this loan are fixed, meaning the monthly payment will be the same throughout the life of the loan. Your property is collateral for this loan, so ensuring on-time payments and paying off the loan are very important.
- Home Equity Line of Credit (HELOC): A HELOC lets you borrow from your home’s equity indirectly through a line of credit determined by your property’s existing equity. With a HELOC, you can borrow as much as you need within your credit limit, much like a credit card. There is usually a draw period of 10 years, during which you make interest-only payments each month or can pay more. The interest rate on the HELOC is variable, so it changes with market conditions, which will affect your monthly payment. Once the 10-year draw period has matured, the loan becomes a 15-year fixed rate loan with monthly payments on interest and principal. Your rate will depend on market conditions. Just like a home equity loan, having a HELOC will not change your current first mortgage loan.
- Cash-Out Refinancing: Refinancing your home loan can be another way to access your equity. Known as a cash-out refinancing, this loan will include the balance of your first mortgage plus the amount of money you borrow from your home’s equity. Lenders will let you borrow up to 80% of your home’s value with a cash-out refinance, according to Lending Tree. Keep in mind that your monthly payments will increase, so you’ll need to budget accordingly.
No matter which loan you use, tapping into your home’s equity is a great option because it has lower rates than credit cards and personal loans.
Customize Your Home
Owning your home lets you make improvements based on your taste and style without approval from a landlord. Additionally, those upgrades can be done using the home’s equity, which could then boost your home’s value, depending on the type of project. Keep in mind that if your neighborhood or community has a homeowner’s association (HOA), you will need to get your projects approved first to avoid any delays or conflicts with your association.
Things to Consider Before Becoming a Homeowner
Owning a home is a journey and knowing where to start is essential for a positive and successful home purchase. Here are some tips to prepare for your path toward homeownership.
- Know How Much Home You Can Afford: Evaluate your current financial situation before applying for a home loan. Consider your income and how much is available to pay for a monthly mortgage, property taxes, insurance and utilities. Use an online home loan calculator to get a rough estimate of your mortgage payment based on the amount of the loan.
Also, access your credit reports for free at AnnualCreditReport.com to see your credit score and history. Ensure your report is accurate and start making changes to improve your credit score. These include paying your monthly bills on time and paying off or paying down your debt.
- Save for Down Payment and Closing Costs: Purchasing a home comes with major upfront expenses, such as a down payment, closing costs, insurance and moving costs. Ideally, start saving for a down payment years before you plan to buy to give yourself time to grow your savings. Establish a separate savings account for your home purchase to make it easier to track your progress to your savings goal.
- Build Your Credit Score: Work on getting the best credit score possible as you prepare to buy a home. This is important because it can help you get a lower interest rate on your mortgage, saving you money over the life of the loan. As mentioned, one way to improve your score is to pay off existing debt. Also, significantly paying down debt and making payments on time will give lenders an insight into how likely you are to pay back your mortgage.
If all of this sounds too daunting, stay positive and patient. It takes time to align your income, savings and credit with interest rates and the housing market to a point where you can successfully find a home and get a mortgage. But you’re not alone. Financial institutions such as Travis Credit Union can help you on your homeownership path.
How TCU Can Help
Travis Credit Union is focused on your financial wellness, including all you need to know to buy a home. Our experienced mortgage loan consultants will walk you through the entire process and prepare you for each step. Speak to one of our mortgage experts to get started or visit our Home Loan Center for more information.