In our last blog we discussed some of the social or intangible benefits of home ownership that cannot be achieved as a Renter. Here are a few more:

• A Sense of Security
• Pride of Ownership
• Stability (Renters move every 3 years on average) remaining in one neighborhood encourages participation in community affairs and activities, you develop lasting friendships, and childred benefit from educational continuity.
• Lower Crime Rates in a stable housing area. The homeowner has a greater stake in the prevention of crime in their neighborhood. Homeowners are less likely to become crime victims, have lower teenage pregnancy rates, and achieve higher educational levels.
• Freedom - The home is yours. You can do with it what you want and you can financially benefit from it as long as you live there.
• Predictability- Unlike rent your mortgage payments don't go up over the years so your housing costs may actually decline as you own the home longer. However, Taxes & Insurance costs usually do rise. But these same costs are passed on to the renter at each lease renewal.
• Make improvements to the home which add to your quality of life, and may have the secondary benefit of adding value to the property. Remember Homeownership itself is an investment in your future.
• This is one of the only ways you can leverage of a low initial investment (down payment) to acquire a high value asset (Your Home).
• Real Estate is a low risk investment. It is a durable, marketable asset.
• It can be sold at a predictable price to a dependable group of available buyers as long as you allow enough time and exposure
• It marketability is reinforced by the fact that financial institutions are almost always willing to loan a high percentage of the home's value.
• This ability to use the Home's Equity is financially beneficial at every stage of your life including: paying off high interest debt, home improvement, college expenses, medical expenses, starting a new business, and this goes all the way to a source of retirement income.

Now we are going to explore in more detail the financial implications of home ownership.

Appreciation
Equity Creation and Uses / Forced Savings
Tax Benefits Appreciation

Although real estate moves in cycles, sometimes up, sometimes down, over the years, real estate has consistently appreciated. This consistent appreciation makes your investment in your home a hedge against inflation.

Now you need to consider some facts about this benefit. First is the fact that in the very long term over a period of 20-30 years Real Estate appreciation rates are lower than many other investments (ie. stocks other equity instruments). They more equivalent to Government Bonds. But, there are periods of great appreciation which can be taken advantage of if one is not forced to sell in a period of depressed prices.

In addition, though other investments have better long term rates of return they require investment of cash and most people are not consistent in making this investment. Because your mortgage payment is a forced saving. In addition, the leverage of a small downpayment, plus mortgage payments, will result in the eventual ownership of a an asset that could be hundreds of times greater than your investment.

The total amount of Homeownership equity is thousands of times greater than the total of all other sources of wealth for the great majority of Americans.

Equity Creation and Uses / Forced Savings

Your Mortgage payment that you are forced to pay each month is a savings account for you. Each month less of that payment is interest that goes to the bank and more cash that is going into your savings account that we call equity in your home. Over time the savings portion begins to increase dramatically each month. As we discussed above this equity savings account is financially beneficial at every stage of your life including: paying off high interest debt, home improvement, college expenses, medical expenses, starting a new business, and this goes all the way to a source of retirement income.

THE TAX BENEFITS

They say there are only two things you can count on in this world: death and taxes. But when it comes to owning a home, it appears there may be a third. And that is the favorable treatment of home ownership by the Internal Revenue Service.

YOU GET THESE BENEFITS WHEN YOU BUY - DURING ALL THE YEARS YOU OWN - THEN AGAIN WHEN YOU SELL

1. The purchase

When buying your own home, most of the expenses are not tax deductible. But there is one exception that is worth finding. The IRS says you can deduct interest in the year that it is paid, and that is usually part of each monthly loan payment. In addition, if the day you purchase is on any day other than the first of the month, you will likely pay a charge for "daily interest" between the day of closing and the end of the month. Look on line 901 of your HUD settlement statement. Much more importantly, the IRS says that, in most cases, loan discount points and origination fees are tax deductible to the buyer, regardless of who pays them. Look at lines 801 and 802 of your settlement statement and see if you hit the jackpot. This is a particularly unusual deduction because you get the benefit even if the seller paid your closing costs. And because origination fees of 1% and more are common, this can amount to a lot of cash.

2. Mortgage interest

In general, you can deduct interest charged on a loan used to acquire or improve your principal residence in the year that it is paid. In the early years of a loan, most of your monthly payment is interest, so this can really add up.

If you are in a 28% federal tax bracket, this can have the effect of lowering your borrowing costs by almost a third, depending on which state you live in. This is truly nothing more than a subsidy to home owners, and it's a very popular deduction.

In addition, you can always deduct interest on an additional $100,000 of mortgage debt, which can be used for any purpose. This is called the "Home Equity Loan" exception, and it allows you to tap into your home equity for any purpose. This gives home owners the ability to do what is called "debt-shifting."

For example, if you live in an apartment and have a credit card balance of $10,000 at 18% interest, none of that interest would be deductible. But if you bought a house, obtained a home equity loan for $10,000 and paid off the credit card, then ALL of the interest expense becomes automatically deductible.

Furthermore, the rate on the home equity loan is likely to be around prime plus one or two, usually much lower than credit card rates. This same technique works with any and all personal debt, from car loans to consolidation loans - with only one hitch. In every home equity loan, you have pledged your house as collateral for the loan. If you fail to pay the payments as agreed, you could lose your house to foreclosure. So be careful in using this technique.

3. The sale

This is the best. In fact, I can hardly believe this myself. Here's how it works: If you have owned and occupied your principal residence for at least two of the past five years, you can earn up to $500,000 on the sale of that house and pay no federal income tax whatsoever. That's assuming you are married - singles get up to $250,000 tax free.

And here comes the kicker: You can do this as often as every two years for the rest of your life. This is as good an excuse for getting married as I have ever heard. Buy a fixer-upper in an up and coming neighborhood, work on it nights and weekends for two years, then sell it at a nice profit and pocket the cash, totally free of federal taxes. And most states recognize the federal exclusion, so you put the cash away totally tax free. You don't have to re-invest, you don't have to be age 55, and you can do this every two years forever.

No, I'm not kidding. The one restriction is that you MUST own and occupy the house as your principal residence, so don't try this on a rental property by pretending you live there when you don't. I hope that you will find something of value in each BLOG entry. In addition, I hope that you will consider contributing something of value by adding your comments to any blog entry.

Return frequently to see what is new,

Evelyn Bruder,REALTOR, CRS, GRI, ABR, E-PRO