Is a home a good investment?

According to the annual National Housing Survey in 2003 conducted by Fannie Mae (the largest non-bank financial services company in the world), more than four out of five Americans – 84 percent – think the main reason to own a home is that it is a good long-term investment.

Not only that, the vast majority of homeowners – 87 percent – report that their homes increased in value since they first bought them. In fact, 76 percent found that their housing investment has increased in value even more than they had expected.

There are four main reasons why home ownership is a good investment:

1) Lower taxes. “Homeowners pay for their living space by making mortgage payments to their financial institution or broker instead of paying rent to a landlord,” says LendingTree Chief Consumer Officer Ed Powell. “This saves them hundreds or even thousands of dollars in income tax – every year.”

You are allowed to deduct the interest on your mortgage payments, as well as your property taxes, from your taxable income as long as your mortgage doesn’t exceed the value of your home. And a home is defined as any property that contains a sleeping space, toilet and cooking facilities. Conventional houses qualify, of course – but so do condominiums, cooperatives, mobile homes, motor homes and even boats.

If you and your spouse buy two houses, you can claim the interest and taxes on one house each. And you don’t have to be married to reap the benefits of this rule. Let’s say you decide to buy a vacation condo with your sister or your best friend. Each of you can deduct your part of the interest.

There are some exceptions and restrictions. You’re limited to $1 million worth of tax-deductible interest payments ($500,000 each if you’re married and filing separately). And a few states or regions issue Mortgage Credit Certificates (MCCs), which provide a tax credit rather than a deduction to low-income first-time homeowners.

2) An asset that goes up in value. Homes tend to become more valuable over time. Prices in the U.S. have risen by three to six percent annually for the past couple of decades. This means if you bought a house for $250,000 12 years ago, you’ll probably be able to sell it for around $500,000 today, resulting in a $250,000 profit.

Of course, some properties are more valuable than others. If you’re just about to buy a home, the most important predictor of its future value is location. It’s better to buy the cheapest house in a good neighborhood than the best house in a less desirable neighborhood. How to spot a good neighborhood? It’s safe and located near reliable transportation, good schools and shopping.

3) Tax-free profits. In the above example, your entire $250,000 profit on your house is tax-free. “Under current U.S. law,” says Powell, “you’re allowed to make up to $250,000 on the sale of a principal residence. Couples who are filing jointly can make up to $500,000.”

However, you must have owned the property for at least two years and have lived in it for two of the five years prior to the sale to qualify for the tax benefit.

4) Stable expenses. Rent usually increases every year. But if you have a traditional 30-year fixed-rate mortgage, your monthly payment will remain the same.

Even if there were no tax advantages or profits to owning your own home, there is another good financial reason to buy if you can afford to: you’ll have a solid asset to show for the money you would otherwise spend on rent. Looked at from this point of view, buying a home is like putting extra money in a savings account. Moreover, you’ll have the enjoyment and sense of security that owning a home brings.

 

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