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Pros and Cons of Homeownership

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Homeownership can be expensive, there’s no doubt about it. Dealing with repairs or just regular maintenance can be downright costly. Sometimes it might feel like you are constantly paying out without gaining any benefits in return.

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While you probably won’t see the financial benefits of being a homeowner right away, in time, they will be very apparent. Following are the most common benefits you’ll see.

Natural Appreciation

Even if you don’t make any changes to your home, but you keep it well maintained, your house may appreciate over time. It may not be a lot and it may even fall from time-to-time, but eventually the values usually come full circle. We saw this with the housing crisis. So many homeowners lost tremendous value in their homes. But, those that stuck it out are seeing those values come back again.

If you are in your home for the long haul, chances are you will see a return on your investment just with natural appreciation.

Building Equity With Monthly Payments

Every time you write that large mortgage payment check, you build equity in your home. Just how much depends on many factors including your interest rate and the term of your loan. Every payment, however, gets you that much closer to owning your home free and clear.

You can look at your amortization table from your closing documents to see just how much of your payment goes towards the principal and how much goes to interest. No matter how much goes towards the principal, though, you make gains with every mortgage payment you make. In other words, your investment gets larger with every passing month.

An Emergency Savings Plan

While we don’t recommend using your home’s equity as your emergency savings plan, it could work in a pinch. Because you reduce your principal with each payment you make, you increase your investment. Once you hit the point where you owe at least 20% of the home, if not more, you can tap into it with a cash-out refinance. If you end up in a serious situation where you don’t have the money to pay for, the equity in your home can be your ‘back up’ plan.

Tax Deductions

Many homeowners enjoy the tax benefits of owning a home. While you do have a lot of expenses as a homeowner, many of them can reduce your tax liability including:

  • Interest paid on the loan
  • Interest on a home equity loan (up to the first $100,000)
  • Real estate taxes
  • Points paid on your loan

You can often use these deductions if you itemize your tax deductions each year. The interest deduction alone could be a rather large deduction for you, as could your real estate taxes depending on where you live.

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Capital Gains go Untaxed

Usually capital gains are the first thing you worry about when paying taxes. You want to avoid too much of a profit as you know it will get eaten up by taxes. With your primary residence, though, this isn’t the case. If you are single, you can keep up to $250,000 profit from the sale of your home tax-free. The only stipulation is that you must live in the home for 2 years in order to qualify.

If you are married, you get an even larger profit as you can make up to $500,000 before being taxed on your capital gains. Again, however, you must live in the home for at least 2 years as your primary residence.

Homeownership Can Increase Your Credit Score

You might think even think of the ramifications of your mortgage on your credit score, but if you pay it on time, it can help in a big way. Credit scores are comprised of many factors including timely payments, the type of debt, and the age of the debt.

If you keep the same mortgage for many years and make regular payments on it, it could help improve your credit score. In the same respect, though, if you miss payments or default on the loan, it could have a drastic negative effect on your credit score. The best thing to do is only take a loan that you know you can afford to avoid anything negative from occurring.

There are many financial benefits of homeownership, and each person is different. Even if your home’s value drops or you don’t see your home appreciate fast, it will. Investing in real estate is meant as a long-term investment. It’s not going to have a quick turnaround or make you a quick profit. In time, though, it can be one of the most lucrative investments you make in your lifetime.

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How to Use Home Equity as Retirement Income

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One of the largest investments you’ll make in your lifetime is your home. But did you realize that you can live off the equity when you retire? This can come in especially handy if you didn’t quite save enough for retirement. While you can’t count on your home solely for your retirement income since home values are so volatile, it can be a supplement to your retirement income.

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So how do you make your home equity work for you? Check it out below.

Sell Your Investment

First, you should know that the IRS allows quite an exception for capital gains on your home. As long as you lived in the home for at least two of the last five years, you can exclude up to $250,000 in capital gains if you are a single taxpayer and $500,000 if you are married filing jointly. This means you can earn $250,000 or $500,000 in tax-free retirement income.

Of course, you’ll need a place to live even after you have the money in hand, so now what? How do you make the most of your situation?

Sell and Downsize

The most obvious way to live on your home equity is to sell your home and downsize to a smaller home. This offers a few benefits:

  • Lower price range leaving you with money to live on
  • Lower property taxes
  • Lower homeowner’s insurance
  • Fewer maintenance costs

Sell and Rent

There’s no rule that says you have to buy a home after you sell your original home. If you’d rather not deal with homeownership, renting is always an option. You’ll likely save money on your monthly payments, as well as reap the following benefits:

  • Pay no property taxes
  • Only pay for renter’s insurance which is cheaper than homeowner’s insurance
  • Not have to worry about maintenance and repairs
  • You can live off a larger amount of the capital gains

What to do With Your Home Equity

Now the bigger question is what do you do with your capital gains? Whether you downsize or rent, what you do with the proceeds really determines what happens next. You have a few options:

  • Invest the funds and let your proceeds grow to help you have more money in retirement
  • Put the money in a high-yield savings account to use during retirement

What you choose depends on where you are in life. If you are still a few years from retirement, why not invest the money in low-risk investments and reap the rewards? If you are closer to retirement, however, you may want to play it safe and avoid losing any of your retirement income.

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Other Options to Use Home Equity in Retirement

If selling your home isn’t on your top list of things to do, there are a couple of other ways you can live on your home equity:

  • Take out a home equity loan – Find a lender that allows you to withdraw up to 80% – 85% of your home’s equity. If you’re nearing retirement, you should have little to no first mortgage, so there should be plenty of home equity to use. Keep in mind that you’ll have to make payments each month depending on the type of home equity loan you take. A home equity line of credit requires interest only payments for the first 10 years and then full principal and interest payments for the next 20 years. If you take out a home equity loan, you’ll pay principal and interest for 20 years.
  • Take out a reverse mortgage – If you and your spouse are over the age of 62, you may be able to borrow the home’s equity in a reverse mortgage. The reverse mortgage doesn’t require you to make any payments while you are alive (and living in the home). You use the equity as income, receiving it either as a lump sum or in monthly installments. The mortgage does accrue interest, but you don’t have to pay the balance back until you or your heirs sell the home.

If you look at your home as an investment, it can be a retirement income vehicle for you as you age. Whether you stay in the home (aging in place) and take out a reverse mortgage or you sell the home, downsize, and live off the proceeds, your home can help supplement any money you’ve saved for retirement thus far.

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How to Pay Your Mortgage Off Faster

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You took out a mortgage with a specific term, but now you want to pay it off faster. Fortunately, you don’t have to refinance to pay your loan off sooner. There are ways that you can make larger payments, getting your principal paid down faster, which pays your loan off early.

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Pay a Little Extra Every Month

Most lenders allow you to pay extra money toward your principal balance. How much you pay depends on what you can afford. Whether you send an addition $50, $100, or $500 – it’s up to you. Just make sure you mark your mortgage coupon accordingly. There should be a spot to mark the extra principal. This ensures that the extra funds get allocated correctly.

While $50 or $100 a month doesn’t sound like a big deal, it adds up. Even this little amount can knock some interest off the life of the loan and a few months off your loan’s term. The key is to keep the extra payments consistent for the greatest results.

Make an Extra Payment Every Year

It’s easy to make an extra payment every year. You have two options:

  • Make one lump sum payment – If you get a bonus, tax refund, or have some other way that you get a windfall, you may want to make the extra payment all at once. You can do this at any time of year. Again, make sure you mark the coupon accordingly so it directly pays down your principal.
  • Pay 1/12th of the mortgage payment each month – If you can’t afford a lump sum payment, divide the payment by 12, and pay that amount in addition to your regular mortgage payment each month. After 12 months, you’ll have made an extra payment that year.

Making 13 payments a year can knock a few years and several thousand dollars of interest off the life of your loan.

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Make an Extra Payment Every Quarter

If you have the funds, make an extra payment more frequently than once a year. If you make an extra payment every three months, you’ll have made four extra payments each year. This could easily knock off several years and a lot of interest off your loan.

Apply a Windfall to Your Mortgage

If you receive a work bonus, work on commission and have a large sale, or get a tax refund, consider applying the funds to your mortgage. You can send any amount that you want to knock your principal down. If you do this regularly, you can knock plenty of time and interest off the life of your loan.

Pay Your Mortgage Every Other Week

This may sound strange, but if you make half of your mortgage payment every other week, you’ll naturally make 13 payments every year. Since there are 52 weeks in the year, you make 26 payments without having to budget extra money. At the end of the year, you’ll have made one full extra payment. If you do this continually, you’ll save yourself money on interest in the long run.

Calculate 15-Year Payments

If you can afford 15-year payments, but don’t want to spend the money on refinancing, here’s a simple tip. Use a mortgage calculator to figure out how much a 15-year payment would be given your interest rate and loan amount. Then make those payments. Make sure you let the lender know that the extra money is for your principal balance. You can then pay your loan in half the time, saving yourself thousands of dollars in interest and being mortgage-free in half the time.

Paying your mortgage off faster is possible. Whether you pay a little or a lot, your efforts pay off in the end. Always check with your lender to make sure they don’t charge a penalty for paying your loan off early, but most don’t today. Also, make sure you don’t pay the lender to set up bi-weekly payments for you. Many will do that as a service, but then charge you a fee for each payment. This takes away from the amount you pay toward your principal balance. You can do it on your own just as easily.

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What is Mortgage Acceleration and Does it Work?

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Many companies advertise the mortgage acceleration program, promising to save you thousands of dollars in interest and cut years off your mortgage. Does it work? Is it worth it? These are the questions most people ask themselves and the professionals.

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While everyone wants to pay off their mortgage as fast as possible, it’s not always worth paying a service to make it happen. You have to pay money to save money, which is a little bit of backward thinking when in reality, the money you pay to the acceleration company could actually go toward your mortgage and further your ability to pay it off faster.

Understanding Mortgage Acceleration Programs

There are two basic ways to accelerate your mortgage according to mortgage acceleration programs:

  • Bi-weekly payments – You pay half of your mortgage payment every two weeks rather than making one full monthly mortgage payment. This turns into 26 half payments or 13 full payments (one extra payment per year).
  • Home equity line of credit accelerator – You take out a HELOC and use the funds to pay your mortgage down. Let’s say you take out a $20,000 HELOC. You pay $20,000 directly to your 1st You then deposit every paycheck to your HELOC, basically living off the HELOC. Any money left over pays your mortgage balance down.

Mortgage acceleration companies charge for both services. The fees vary by company, but they add thousands of dollars to your costs, thus eating away at the benefits of accelerating the mortgage.

However, you may be able to accelerate your mortgage yourself and without any extra cost. Check out how below.

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DIY Mortgage Acceleration

While mortgage acceleration companies claim to have the ‘secret’ to get you out of mortgage debt fast, it’s really not a secret. They are providing a service, which if you can’t trust yourself to handle on your own, may be worth it to you, but most people can manage it.

You can accelerate your mortgage in a variety of ways:

  • Bi-weekly payments – Using the same method mortgage acceleration companies use, you can pay half of your mortgage payment every two weeks (aligning it with your paydays). Just read the fine print on your mortgage to make sure you don’t have a prepayment penalty. Most mortgages today don’t, but if you do, this may not be an option.
  • Make one extra payment per year – If making payments every two weeks is just too much, consider making one full extra payment every year. You can do it at any point. This can knock off a few thousand dollars in interest and a few years off your loan.
  • Pay an extra amount each month – Send in any extra money that you can afford on your mortgage payment each month. Choose an amount that you can afford consistently for the greatest results. For example, an extra $50 or $100 can knock thousands of dollars off your loan and help you pay it off faster.
  • Apply windfalls to your mortgage – If you receive windfalls throughout the year, consider applying them to your mortgage. A few examples include tax refunds, commission checks, bonus checks, or inheritance money.

The key is to set up your own plan and stick to it. If you aren’t sure that you’ll stick to your plan, consider enlisting support – someone to hold you accountable. Whether it’s a family member, friend, or your financial advisor, let someone know of your plan. Set reminders on your phone or calendar and always check up on yourself. Look at your progress as you go to keep yourself motivated. Seeing your mortgage balance decrease will help keep you on track.

So should you pay for a mortgage acceleration program? The truth is that it’s probably not worth it. These companies are doing what you can absolutely do on your own. If you wonder about the financial effects of your extra payments or want help figuring out the best way to pay your loan off the fastest, talk with your financial advisor. He/she can help you figure out the plan that is most affordable and most effective without forcing you to pay a monthly and annual fee for a mortgage acceleration program that you could set up on your own.

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