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Tax Deductions for Mortgage Interest Are Not the Only Befit of Owning Your Own Home

Increased Equity, Family Stability and Becoming a Part of a Community, Are All Part of the Rewards of Home Ownership

By the Mortgage Guy /

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If you ask the man on the street what is the main benefit to owning a home, he will undoubtedly reply with these two answers: you don't have to flush the rent money away any more and the interest on the mortgage is tax deductible. Yes this is true, but there are other reasons that make home ownership beneficial.

Owning a home is an investment, probably the single biggest investment that most people ever make in their lives. This investment grows with time and so does the investor's equity share in that home. Living in a good neighborhood and having a sense of community are also good reasons to own your own place, especially if you have children. Two other benefits are being able to fix the place up just as you like, and then being able to take pride in what you have done with the place afterwards. All of these are just some of the things that motivate people to own their little slice of the American pie.

First and foremost on the list of reasons is of course, tax deductions. The most common tax deduction that people seek is the one associated with interest payments on their mortgage. As long as people itemize thoroughly it can amount to a substantial write-off that is available annually. In the first few years of amortization, the interest accounts for much of the payments being made towards a mortage and this adds up quickly. Further, if a homeowner is in the twenty-eight percent federal tax bracket, this decreases their borrowing costs by about a third, depending on what state they reside in. If this is all done properly, other expenses incurred by the homeowner in the course of a year may also then be deducted from the total amount owed to the Internal Revenue Service.

If an investor has taken out a Home Equity Line of Credit (HELOC), against the accrued value of their property, and they use this money to consolidate and eliminate other high interest debts, such as credit cards and automobile loans, the interest that they will be paying is deductible. What this means is they have very effectively shifted the non-deductible credit card interest to the deducible mortgage interest and saved, while consolidating their payments. Mortgage interest is considerably lower than other types of interest, and this is where the benefit lies within this strategy.

What most folks do not realize is that when actually purchasing their home there may also be a couple of one time deductions to take advantage of. On line 901 of the HUD (Housing and Urban Development) settlement statement Americans can find a deduction for "daily interest", which is the amount of interest that was paid between the day of closing and the last day of that month.

Note: If the property was closed on the first of the month this will not apply.

Further, the IRS will allow for the deduction of any points that may have been paid to get a discount, and the origination fees may also be deducted on a one time basis. With origination fees being around 1% of a loan agreement they can add up quickly, and it does not matter who paid these fees either, for them to be taken advantage of.

This now brings us to the sale of the house and a deduction derived from it. If you sell your property, after having resided in it for two of the last five years, you are allowed up to $250,000 profit tax free for a single person, and twice that for a married couple.

The other benefit most cited by properties owners, is that they are no longer paying rent and they are accruing equity. Equity is the difference between the value of a home and what is owed on it (LTV). If a home is valued at $300,000 and the mortgage has only $200,000 left to be amortized, there is $100,000 in equity. Much of this equity can be tapped in the form of a HELOC and used to consolidate debt, pay for home improvements, afford children a good college education or send someone on a great vacation. People tap the equity in their homes for any number of things. These funds can either be taken in one block or in several, or the lender can issue a check book or debit card that can be used to access the funds conveniently as situations arise.

These are the fundamental financial and economic benefits of home ownership. There are many other benefits as well. Obviously a roof over one's head is a benefit, but to be able to fix up and custom design a residence to specific wants and needs is also a great thing. If someone is renting, it is both difficult to customize the place and an expense that is never of fiscal benefit to them. Unless the renter is planning on residing in a rental property for many years, or has an exceptionally generous landlord who will either share or deduct these types of cost form the rent, these costs associated with renovation and improvement will never be amortized. All the true benefit falls in the lap of the landlord.

If people are living in a home of their own, and it is a pleasant environment, it stands to reason the family as a whole usually benefits. It also goes without saying that children who have a good environment stand a much better chance of being happy and adjusted, then those who are frequently being uprooted and shunted about. Studies have shown that children raised in a good consistent home environment and who were not moved about so much while growing up, stood a 25% greater chance of finishing high school and another 116% greater chance of attending college.

Owning your own home and taking pride in it is also beneficial; working around the house, cutting the lawn and sharing the chores of the day fosters feelings of pride, confidence and accomplishment for many. The same goes for a neighborhood. When someone owns a home in a good neighborhood, and participates with their neighbors, there are similar benefits to be realized. Both children and adults develop strong lasting relationships with their neighbors, and it has been shown in certain studies that home owners tend to contribute to the community within which they reside more so than renters. This feeling of community and belonging usually contributes to living a more content and fuller life.

Whether people are single, just married or have an extended family, owning a home provides many more benefits then simple shelter from the rain. True relief in the form of tax deductions is paramount on most people's agenda, but saving the money, shopping around and then moving into a place of their own to raise their kids and retire in, is the American dream. Times have changed, our society and culture have changed with them, but the one constant people still dream of and aspire to across America, is the security and benefit of owning a home

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