Most people, at some point in their lives, have experienced being a renter, and then eventually, took that big step of purchasing a home once they could afford it. There are pros and cons to both renting and owning a home. The route you choose is generally based on your environment, income, how much debt you want to pay off, and your financial strategy. Bestselling author Morgan Housel has an interesting perspective on how to approach certain life choices and why people decide to do one thing over another. He says, “You have to play your own game. And everyone plays a different game.”
At the end of the day, you have to do what works for you. For many people, the strategy they choose is to own a home of their own. Not only is it a place to raise your family and build a life, but it is also a long-term investment. Consider these five tips for getting the most value out of owning a home in today’s volatile marketplace.
Build Home Equity
With every mortgage payment you make, you are building equity. When you review your closing papers, you can determine how much you are paying toward interest and the overall balance of your loan. Over the years, you start paying off the loan, and your home value increases. The difference between the two is your home equity.
Put a Price Tag on Your Home
Home value appreciation is the rate of a home’s value increasing over time. As this value increases, homeowners tend to build equity and can potentially receive a profit during a resale in the future. Many people make modifications, add extensions, and add other luxuries or necessities to help increase the value of their home.
Make Taxes Work for You
There are several tax advantages to owning your own home if you are eligible. A few of these options include:
- Property tax deduction
- Mortgage interest deduction
- Home equity loan interest deduction
- Home-office deduction for the self-employed
- Energy efficiency and clean energy credit
- Sale of primary residence deduction
A financial professional can help you determine which may work for you and your financial situation.
Cash is Available When you Need it
There are a few different ways home equity can help you if you need cash. Lenders generally don’t restrict how the cash is used whether it is for home improvements or paying down debt or any other need. Some of these options include:
Home equity loan or home equity loan installment (HELOAN)
A HELOAN is a one-time installment loan that allows you to use the equity in your home as collateral. This option offers different benefits including a fixed interest rate that could be lower than other loan choices. It also offers a regular monthly payment, which gives you a manageable repayment schedule for the life of the loan.
Home equity line of credit (HELOC)
A HELOC is a line of revolving credit that is often used for larger expenses or consolidating higher-interest rate debts on other loans like credit cards. It is attractive because it generally has a lower interest rate than other loans. Also, interest may be tax deductible.
Cash-out refinance
A cash-out refinance allows you to use the equity you have built up to pay for, for example, renovations and home improvements that can increase the value of your home.
Reverse mortgage
A reverse mortgage is a type of loan that permits homeowners to borrow money using their home as leverage for the loan. Similar to a traditional mortgage, when you opt for a reverse mortgage, the title of your home stays in your name. One noticeable difference is with a reverse mortgage, borrowers do not make monthly payments. The loan gets repaid after the borrower has left and no longer resides in the home. Fees and interest are tacked onto the balance each month, increasing the balance. One must also be aware of the disadvantages of reverse mortgages. More information can be obtained by contacting the National Council on Aging.
Consult Your Financial Professional
Depending on your financial situation and goals, and considering that everyone is unique, take the time to consult a financial professional to help you analyze these critical and complex financial decisions. Discussing owning a home versus being a renter with your financial professional can make significant impacts from working to preserve and manage your wealth, to trying to mitigate unforeseen risks before or if they arise, to providing insight into how to modify your financial strategy.
Important Disclosures:
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Sources:
What is a reverse mortgage? | Consumer Financial Protection Bureau (consumerfinance.gov)
What is a Home Equity Line of Credit and How Does it Work? (bankofamerica.com)
Cash-Out Refinancing: How It Works, When To Do It | Bankrate
This article was prepared by LPL Marketing Solutions
LPL Tracking # 564398
