Learn how you can use home ownership effectively to build wealth more efficiently…
In the current economy there are many who are facing home ownership difficulties due to COVID-19 and the economic downturn that has occurred.
Even so, there are still ways that you can build wealth through home ownership and in this discussion we will address ways that you can use home ownership to build wealth and reach a level of success that can make life more enjoyable for you and your family.
As the creator of TheWealthIncreaser.com gears up for the 2020 tax season the thought of home ownership and how you can use it to build wealth continued to enter into the atmosphere whether from emails from around the world or client contacts at the office.
By mentally grasping the following paragraphs prior to purchasing your home you can position yourself and your family for more wealth building success and a more successful home ownership experience at the various stages in your life.
Make sure you have at least 15 minutes available as this discussion is longer than most and you will have the opportunity to frequent very important links that can put you on a more prosperous path and your time spent will further position you for a lifetime of wealth building success.
You must purchase your home with the end goal in mind
It is important that you begin your home purchase by knowing that you will need to have a down payment and pay closing costs. You must also be aware of what you plan to do at the end of your home ownership period prior to your home purchase.
Although life is unpredictable to a large extent, you still want to go into your purchase knowing your intentions as to how you will transfer your home at the end of the desired period of your home ownership.
What you really need to know:
Credit Sore is used by lenders to rate your credit and ranges from 300 to 850. The higher your credit score–the better your mortgage interest rate–generally speaking.
Down Payment is the amount that you will put down on your home purchase to help reduce the loan amount and normally range from 3% to 20% but can be as low as 0% to as high as you want to go as long as it is less than 100%.
Closing Costs are costs that you will have to pay to close on your home and they are determined by the type of loan and lender that you choose, along with seller contributions that were negotiated.
Refinance is when you go to a lender and redo your loan for a lower interest rate and possibly shorter loan term and can possibly help you save thousands over the life of the loan. It is important that you “run the numbers” prior to a refinance to ensure that the new loan will benefit you in a way that is more beneficial to you–not the lender. Your credit would be pulled if you were to refinance your loan.
Cash Out Refinance is when you refinance for more than your current outstanding loan balance (your credit would also be pulled) and use the cash for other purposes. If you use the proceeds for Housing Repairs you can deduct that usage amount (interest portion) on your federal tax return. Many lenders will limit the amount of your refinance at 80% of your homes market value.
Home Equity Loan or Line of Credit (your credit would also be pulled) is when you obtain a home loan or credit line using your home equity as collateral and it too would be deductible (interest portion) up to a limit if you use the proceeds for home repair.
Loan Modification is when you modify the terms in your loan agreement and in many cases a modification does not require the use of your credit score. This is a process that is often used when there is a layoff or change in income and you desire to hang on to your home in spite of difficult times.
Rental is the process of renting a room or your entire house for a period of time where you collect rent and include the gross receipts on your tax return and deduct rental expenses (possibly including mortgage interest and depreciation) on your tax return and that will normally provide tax benefits to you on the front end.
Your gain from the sale of rental property would normally be taxable. At the time of sale “recapture” of the depreciation that you claimed (or failed to claim) will normally be due, thus reducing the amount of the sales proceeds at the time of sale or once you file your federal taxes.
Sale is when you sell your home and hopefully for a profit. You are entitled to a Tax Exclusion from sale of $250,000 on your personal residence if you are single or $500,000 if you are married if you meet the requirements.
Will or Estate Planning is when you leave the property for a loved one or charitable organization as outlined by you.
Emergency Fund is an account that you should have such as savings or money market account that you can tap into when emergencies occur. You want to properly fund this account as soon as you are able to do so as that account can help you avoid the need to borrow or tap into your retirement accounts.
Cash Flow is knowing what you have left over after payment of your monthly expenses so that you can live at an expected level of comfort–and it is important that you know your cash fl0w prior to purchase.
You must know how to use the tax advantages of home ownership upfront
There are many tax advantages to home ownership and it is important that you are familiar with them all as you don’t want to miss out on potential or actual tax savings by not being aware of your options.
By knowing the tax advantages of home ownership, you are going into your home purchase with “your eyes wide open” as opposed to merely going through the motions. You are positioning yourself and your family for a lifetime of success as opposed to not understanding what is in store for you.
What you really need to know:
Federal & State Taxes can possibly be reduced due to home ownership as mortgage interest, property taxes and possibly mortgage insurance can all be deducted.
Points or loan origination fees (pre-paid interest that you paid to lower the interest rate) that you paid may also be deductible, therefore you may have to take the closing documents in the year after your home purchase to your tax professionals office to ensure that you get this tax deduction, as it is often overlooked by many new home buyers and tax professionals alike.
Property Taxes will help fund government operations and you can deduct them on your taxes up to a limit if you itemize on your federal tax return.
State–County–City and School taxes are normally included in your property tax payment. Bonds that are issued by your locality are also often included.
Special Assessments are an additional form of tax for improvements near your home–such as sidewalks, sewer etcetera that you might possibly have to pay–however they would generally not be deducted unless you possibly had an office in the home or you used your property for rental purposes.
Homestead Exemptions are available in most states (you normally must be an owner/occupant) and they would have the effect of lowering your property taxes. You generally have to sign up at the local or county level during a designated period after your home purchase to be eligible.
IRC Code “1031 Tax Exchange” is an option other than selling where you can possibly avoid or defer taxation on like-kind property. You may have to convert your home to rental use prior to using a 1031 exchange as the property must be business or income producing. If you decide to rent your property(s) in an effort to build wealth or you do a quick turn of your property in an effort to build wealth there are more concerns such as basis, gross rental receipt, depreciation, material participation and other areas of concern that you may need to address if you desire to build wealth more efficiently–therefore record keeping is very important.
IRC Code “121 Tax Exclusion” from the sale of your home up to $250,000 if you are single or $500,000 if you are married are still on the books and you can use this tax break to build wealth if you use it appropriately. You must occupy the property as your primary residence in 2 of the past 5 years to qualify and this tax exclusion can only be used every 2 years. Many clients of TFA Financial Planning have effectively used this approach to build wealth and reach other goals and you have the opportunity to do the same.
You must know the true cost of home ownership upfront
In addition to your loan that contains principal and interest you will have taxes and insurance and possibly HOA fees.
Furthermore, you will have to budget for monthly utility payments and possible repairs. It is imperative that you create a properly funded emergency fund if you have not done so already.
What you really need to know:
PITI stands for principal, interest, taxes and insurance and you will have to pay all of that if you take out a loan on your home purchase in almost all cases.
If you take out a loan, hazard insurance (in case your house burns down the lender wants to have recourse) will be required. If you purchase with cash you have the option not to purchase insurance, however it is normally in your best interest to do do.
PMI or MIP which is insurance that protects the lender in case you default would be included if you put less that 20% down and would be clearly outlined on your monthly mortgage statement.
HOA Fees or Dues are home owner association fees that some subdivisions, townhouses and condo associations charge monthly, quarterly or annually for varying degrees of services or amenities that you will have access to.
Maintenance includes everything from yard maintenance to repairing or replacing your HVAC system to everything in between and outside of your house that may need repairing including roofing, siding, gutters, soffits, plumbing, electrical and appliances, therefore you must budget for maintenance costs.
Monthly utilities include gas, electric, water, cable, garbage and other fees depending on your locale or subdivision. If you are part of an HOA, some of those fees are sometimes included in the HOA payment.
It is very important that you start your home buying process by beginning (know what you plan to do after your home purchase when you decide to sell–prior to your home purchase) with the end in mind so that you can build wealth more efficiently.
You want to purchase in an improving neighborhood with strong schools and the amenities that you desire in close proximity.
Seller financing and other creative ways of pursuing home ownership is always an option–but should be analyzed and pursued with great caution!
Also, cash purchase is always an option if you find yourself in the fortunate position to utilize this option. If you are a handyman or have building skills you can often find bargain properties that you can rehab and live in or sell at a later date and that can in many cases lead to a large financial windfall for you and your family.
For those who lack those skills you can find bargain properties and use FHA 203k rehab loans or Fannie Mae rehab loans to transform an outdated property into one that will work for you and your family.
Use your imagination to find new and more rewarding ways of building wealth through home ownership based on your unique skills and talents.
In addition, it is important that you know the bankruptcy exclusion amount in the state that you live in so that you know upfront what you need to do to keep your home in case you face financial difficulty. In some states 20% of your home equity may be exempt from bankruptcy filing. In Florida 100% of your personal residence may be exempt from bankruptcy filing.
Refinancing and loan modifications are other ways that you can use to possibly retain possession of your home if you run into financial difficulty and they must also be a part of your consciousness as well. Always realize that “timing” is critical when considering whether you need to file bankruptcy, refinance or modify your loan as you don’t want to “deplete your savings and retirement accounts” and still end up filing bankruptcy, refinancing or modifying your loan.
Your goal should be to avoid tapping into those accounts if at all possible, however if you need to pursue those options, you want to do so at a time that works to your and your family’s advantage–not to the advantage of those who have no real concern for your or your family’s future success.
By landing on this page you have put yourself in a far better position than most first-time home buyers (or any home buyer) and it is the desire of TheWealthIncreaser.com that you will use this discussion as a stepping stone to achieve optimal wealth building success throughout your lifetime.
All the best to your home ownership success…
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