Financial Aspects of Home Ownership

Buying a home is a big decision, with many aspects to consider. Here are a few financial basics you should understand when weighing your options.

Thinking about buying a home? It’s true there are multiple benefits of home ownership. Still, it’s a big decision, with many aspects to consider. Here are a few financial basics you should understand when weighing your options.

Before buying a home, you should have your finances in order and be prepared for both initial and ongoing costs.

Typical expenses when buying a home include:

  • Earnest money
  • Down payment
  • Fees for home appraisal
  • Inspections
  • Various other closing costs

After closing, you will have recurring expenses, including:

  • Loan payment
  • Property taxes
  • Homeowner’s insurance
  • PMI (Private Mortgage Insurance)
  • Ongoing maintenance and repairs

While these costs of home ownership can be daunting, there are several advantages.

  • Equity – Equity is one of the biggest benefits. When you have a mortgage, a portion of the monthly payment is allocated towards the loan’s interest and a portion goes toward the principal. The amount put towards principal is the actual amount of equity, or the actual ownership of the property. Over time, as you pay down the principal, equity will grow and become an asset for you.
  • Tax deductions – Another popular advantage is the federal tax deduction. Your property taxes and the interest paid on your mortgage can be deducted, thereby lowering your income tax burden. Always consult a tax professional for advice regarding this tax benefit.

Of course, buying a home is an investment, so there is also the possibility of financial loss and/or significant expenses:

  • Financial loss – While, in general, homeownership builds equity over time, home value increases are not guaranteed. If home values decrease or decline while you own the home, you stand to lose financially when you sell.
  • Significant expenses – Ongoing maintenance and repairs can be costly. You may find yourself replacing items like appliances, carpet, windows or heating/cooling systems, just to name a few.
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