Owning a home is a staple tenant of the American dream because you have a place to call your own, mortgages are generally cheaper than paying rent, and you have the ability to paint and decorate as you see fit.
But did you know you can use your home to build wealth?
When you take out a mortgage on a home, you begin to build equity and ownership in a long-term asset that can set the foundation for your wealth over time.
Today we will discuss how taking out a mortgage and buying a home can be one of the best financial decisions you make for yourself and your family.
Buying a home is one of the most significant financial transactions in most people’s lives, and it is often seen as a rite of passage for most American’s when they transition from renting to buying their home.
There are plenty of benefits to owning your home, including designing and decorating as you see fit. There is no landlord to tell you how to live in the house, and paying a mortgage is generally much more affordable than paying rent.
Buying a home also enables you to choose where you want to live. Do you want to live in the city? Or maybe you prefer the suburbs or something more rural.
Regardless of where you choose, you have options, and the freedom to live where you want is a rewarding feeling.
Most people take out a mortgage to finance real estate purchases because it helps manage cash flows and build a budget.
Mortgages can also help you create long-term wealth since you will build equity in the home over time as you pay down your balance.
At their core, mortgages are long-term loans that require you to place a down payment, pay a set interest rate, and as long as you make your payments on time, at the end of the term, you will own the home and have no more balance to pay.
Most mortgages are either 15 years or 30 years long. 15-year mortgages generally charge a higher interest rate with a higher monthly payment because you will ultimately pay less over time than you will with a 30-year mortgage.
However, people who want a lower monthly payment generally opt for a 30-year mortgage because even though they will ultimately pay more in interest over the long run, the monthly payment will be more affordable.
Since there are many forms of mortgages, it’s essential to shop around and have a solid understanding of your budget and what you can afford so that you make the best decision when you purchase a house.
It’s easy to borrow above your means, so before you close, double-check your monthly cash flows and make your money work for you.
Now that we understand how mortgages work and why they are an important component of homeownership, let’s discuss how you can build wealth By financing your home with a mortgage.
- Capital Appreciation
The first part of wealth-building that most people will associate with ownership is capital appreciation. The average home price has increased over $200,000 over the last twenty years, and that trend is unlikely to change.
Eventually, most people will sell their homes if they want to move or upsize due to a growing family. Assuming your home appreciates significantly, you may be worried about paying capital gains tax when you sell your home.
Thankfully, the IRS allows you to keep most of the profits from selling your home without paying a capital gains tax of up to $250,000 for single homeowners and $500,000 for married couples.
This means you potentially can walk away with over $250,000 in profits, not paying a penny in capital gains tax.
It’s important to remember that this benefit only applies to your primary residence and not a second or third home.
- Tax Savings
Another benefit of financing a home purchase with a mortgage is that you can deduct some homeowners’ expenses from your taxes on your tax return to lower your overall tax bill.
Examples of deductible homeowners expenses include the interest you pay on your mortgage, both your primary residence and a second home which can help potentially save thousands of dollars annually from your taxable income.
Increase Your Net Worth
At the beginning of your mortgage, you are mostly paying down interest as well as principal. The further you get into your mortgage payments, the more you will pay down the loan principal, which will ultimately lead to you building a majority of the equity in the home.
Equity in homeownership refers to how much of the actual property you own versus how much is left on your mortgage balance.
For example, if you have a $300,000 mortgage and you have paid $150,000 worth of payments, you will have 50% equity in your home.
You can use that equity if you need to take a home equity line of credit loan, and it will also reflect in your net worth because you now own $150,000 worth of an asset. This is why homeownership is such a powerful indicator of financial health.
- Rental Income
Another popular way to build wealth by utilizing a mortgage is to purchase an investment property to rent out to tenants or to rent out a room in your primary residence with short-term rental services.
Developing rental income takes a few additional steps depending on how you plan to purchase a rental property.
If you purchase a property explicitly for income-generating purposes, you need to put down a minimum of 20% on the down payment. However, if you live in your primary residence for one year or more, you’re eligible to rent it out if you decide to purchase another home or move into an apartment.
Rental income is especially beneficial because it is considered a passive income stream. Passive income streams do not require much if any additional effort on the investors’ end because they do most of the legwork out front.
In this case, the legwork is purchasing and maintaining the home.
Hopefully, you can see how powerful a mortgage will be in helping you build wealth and creating a sustainable financial plan.
Not only does a mortgage enable you to live in a home you purchase, but it can also be used for tax savings and even building rental income.
If you have further questions about mortgages or want to know some of the best mortgage providers, please check out our reviews and guides.
* This content is not provided by the financial institution or the offer’s provider. Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and does not constitute a financial or expert advice.