Dan Marchiando's Mortgage News Blog

“Fixing” or Locking in the “Rent”
Homebuyers who buy at today’s home prices have the potential to “fix” the majority of their monthly housing costs decades into the future. Since the mortgage payment is the majority of a person’s housing expense, and the most common mortgages have fixed interest rates, a homebuyer has the potential to know this cost for the next 30 years. And because California has Proposition 13 to control property tax growth, which is typically the second biggest housing expense, buying a house can make sense in the long run, when compared to rent that creeps up year after year forever. Granted, the monthly cost of buying can be more than renting in the short run, but as rents increase owning eventually wins out.

More so than renters, homeowners have the ability to personalize the home as they want—to make it fit their personality, life-style, and needs. Some homeowners feel a sense of pride and elevated status from homeownership.

The potential for more stable housing costs, plus less hassles and fewer moving costs as homeowners can control their destiny, instead of being subject to the whims of a landlord.

Income Tax Savings
Prior to buying a home, most taxpayers use the Standard Deduction. Having mortgage interest and property taxes to itemize on a Schedule A can increase tax deductions and open the door for other Schedule A deductions, thereby reducing income taxes. Mortgage interest can also be helpful to some taxpayers subject to the Alternative Minimum Tax. Talk to a CPA for details.

Tax-free Capital Gains
Owners of a residential property that is used as a “Primary” residence have the potential to shield $250,000 to $500,000 (depending on marital status) of Capital Gains profit from taxation, upon the sale of the home. Talk to a CPA for details.

Leverage Supercharges Return
Most homeowners finance or “leverage” their home purchase, because they don’t have the resources to pay cash. And this so-called “leverage” can lead to greater return on investment than paying cash for the home. Imagine a buyer who purchases a $500,000 home with all cash that then grows in value to $750,000 in ten years. That amounts to about a 4.1% annual return on investment. The buyer who puts a 10% down payment and makes monthly payments could have an annual return on investment over 12% after ten years.

Inflation can eat away at the purchasing power of the dollar, and increase the cost for goods and services like food, gas, clothing and rent. The effect of inflation on people with savings is thus a negative. But in the case of debtors, inflation can be a positive in that the borrower is paying off a loan in the future with dollars of lesser value. So the key may be to have a balance of savings and debt.

Forced Savings
Most mortgage payments today include a portion that goes towards paying off the mortgage principal balance. So a portion of that monthly housing budget goes towards saving and building equity in a potentially valuable asset.

Retirement Planning
Homeownership can become an important part of a retirement plan. Many homeowners set a goal of paying off or paying down their mortgage by retirement, so their housing costs are reduced, so they can cope with reduced income in retirement. As a “Plan B” a home’s equity in many cases can be tapped in retirement with a Reverse Mortgage.

A home can be a major part of a wealth legacy left to heirs. In most instances today, this legacy can become a tax-free transfer of wealth from one generation to the next.

As always, thanks for your interest,

Dan Marchiando, your California Mortgage Broker and Loan Officer

Posted by Dan Marchiando on March 16th, 2015 5:56 PM