Recently, several people have asked whether this is a good time to invest in a house -- especially given low interest rates and the discounting of the housing market.
The answer, of course, is that it all depends on your needs and your ability to afford a real-estate purchase. That said, if you can afford it home ownership can provide substantial tax benefits.
If borrowing to buy, your interest payment is a deductible item which can lower your taxable income. Both mortgage interest and property taxes are qualified tax deductions. This is true up to the first $1 million of original debt used to purchase your principal residence.
In addition, if you’re lucky and sell your home for a profit, that profit and/or gain could be tax-free. Here’s the rule: you can exclude up to $250,000 of gain if you are a single taxpayer. If you’re married and filing jointly, you can shelter a gain of up to $500,000.
There is a residency condition to the rule: to qualify, the home needs to be owned by you and have served as your primary residence in the last two of the preceding five years. For most people, buying a home brings lots of emotional satisfaction, but these tax benefits really make home ownership attractive.
You can do this again and again, assuming current rules stay in place. Imagine buying a home for $200,000, selling it for $400,000 to earn a tax-free gain of $200,000 -- then buying another home for $400,000 and selling it for $600,000, again making a tax-free $200,000.
It’s also a great time to get a new mortgage, according to a recent article in the Wall Street Journal -- but if you’re thinking of doing so or just refinancing your current home, don’t delay too much longer.
The fact is, new loans are starting to get costlier. The mortgage market is facing pressures, there are new laws and regulations setting in to drive expenses higher, and there’s a need for government-owned mortgage players to shore up their finances.
A review of current mortage data shows the rate for a 30-year fixed loan is hovering at about 5 percent for those with good credit, up about 1 percent from last year's low. Historically it’s still a good interest rate, but rates won’t be low forever and as the economy expands, so too will rates begin to climb.
If you delay a purchase decision, you might face higher closing costs and interest payments. That said, the purchase of property is one of the largest economic decisions in your life, so it’s important to give all the components of the purchase due consideration before making the commitment.
If you’re shopping for a mortgage, lenders provide “good faith estimate” cost sheets which itemize the loan’s interest rate, title insurance costs, and fees for loan origination, appraisal, credit reports, document preparation and recording. Typical estimates can range from $4,000 to $7,000.