Buying a house is a large part of the American dream. You get a place to call your own, you can decorate at your discretion, and you can feel safe and secure knowing that you live on your own property.
Homeownership is one of the best ways to build wealth because the more you pay into your mortgage, the more equity you develop in your home. Since home prices generally appreciate, you will have an asset that will help build your net worth for decades to come.
It’s hard to discuss buying a home without diving into how a mortgage, taxes, and all of the expenses associated with homeownership and how they impact personal finances.
From closing costs on a mortgage to buy a new air conditioning unit and even eventually selling your home, there are dozens of areas where a house and a mortgage have a tangible impact on your finances.
Today, we will discuss all aspects of how a house Affects your budget, cash flow, and net worth.
Mortgages
At their core, mortgages are long-term loans that include both the principal balance for your home and an interest rate that you pay to the lender for letting you borrow the money.
The two most common mortgage terms are 15 years and 30 years. There are pros and cons to both, depending on your financial situation and budget.
15-year mortgages generally have a higher interest rate because you’re cutting the term in half that the bank could have charged for a 30-year mortgage. However, you generally pay less overall in interest because there is less time for it to compound over the life of the loan.
If you are comfortable with a higher monthly payment, 15-year mortgages can be a great tool to pay down debt quickly and save money on interest.
Conversely, 30-year mortgages generally charge a lower interest rate and have a lower monthly payment because you will ultimately pay more in interest over the 30-year term.
Take some time to look at your monthly budget and see how much a 15-year mortgage would cost per month versus a 30-year mortgage. You can use tools like amortization tables to see how much money you will pay in interest over the course of the loan and how much your monthly payment could be.
Interest Rates
As you can imagine, interest rates play a vital role in personal finance. Interest is the price you pay to borrow money, and everything from credit cards to personal loans and mortgages charges an interest rate so that the lender makes money.
In a mortgage, interest rates are amortized over time where you pay a bulk of the interest up front, and on the back half of the mortgage, you pay down the principal balance of a loan which is where you will generate the most equity.
Some lenders enable you to specify where your payments go, and if this is the case, you should tell your lender that you want most of your mortgage payments to go to your principal.
If you can quickly pay down your principal balance quickly, there will be less of a balance than the interest and charge, reducing your overall expense by potentially thousands of dollars.
Variable Vs. Fixed
When you shop around for a mortgage, you will probably see the variable and fixed options everywhere you look.
Variable mortgages offer a very low-interest rate for the first 5 to 7 years of the line, and it will increase after the variable. To match closer to what the open market interest rate is.
The benefit of a variable mortgage hangs in the opening discounted rate, but if interest rates increase aggressively when your variable rate kicks in, you may end up paying more than if you had started with a fixed-rate mortgage.
Fixed-rate mortgages are exactly what they sound like. You will pay the same interest rate for the entire life of the loan, and outside market forces will not impact the interest rate you pay until the loan is closed.
In high-interest environments, variable mortgages may be beneficial because if the interest rate falls, you will not be stuck with a higher interest rate than everybody else.
Conversely, in low-interest-rate environments, like where we are currently, it may be best to walk in as low as possible since interest rates cannot go much lower.
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Building Wealth
Owning a house and paying down a mortgage helps build your wealth and increase your net worth.
When you pay rent to a landlord, you do not receive any ownership in the apartment or house you are renting. However, every month to pay your mortgage, you own a little bit more of the house.
As you increase your equity percentage in your home, your net worth will increase with it because you own parts of that asset, and once the mortgage is paid off, you will own the entire property.
You can also build wealth by renting out a room or your entire home to create passive income streams. If you can afford to purchase a second home to use as an investment property, your tenants will pay down your mortgage as well as provide another stream of income.
- Selling Your Home
If you outgrow your home, or it appreciates substantially, you may want to sell it to capitalize on the gain in its value.
The IRS allows single people to take up to $250,000 in profit when selling their home without
paying any capital gains tax and up to $500,000 in profit for married couples.
- Closing Costs And Fees
Closing costs and additional fees are some of the more expensive components of taking out a mortgage. When a seller accepts an offer on a home, you are obligated to pay closing costs to the lender or to create and facilitate your mortgage.
You can pass some of the closing costs to the lender in some instances, but you generally have to pay something. Keep in mind that closing costs can cause between 3% and 6% of the loan value.
Taxes
It’s been said that the only things certain in life are death and taxes. Thankfully, mortgages can help you decrease your taxable income because you are able to write off a portion of the interest you pay on your mortgage and even some home improvement costs.
Final Thoughts
As you can see, there are plenty of ways mortgages impact personal finances aside from the obvious monthly payment. If you can leverage yourself correctly, you will be able to lower your taxable income while building equity in your home.
If you have other questions about mortgages or finding the best mortgage provider, check out our other guides and reviews that are excellent resources.
* 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.