Buying a home is likely to be the biggest purchase that you make during your lifetime. However, unless you have a large wad of cash in the bank, chances are you will need to finance your property purchase. One of the most common ways to do this is to take out a home loan.
A home loan is a secured loan and widely considered to be one of the most cost-effective ways of borrowing money to purchase a property – whether it is your first home or a new one to fit your changing needs. The duration of your loan, and the interest rate that you will pay on the amount you borrow, will depend on various factors. This includes the cost of the home you wish to buy, and your eligibility for the loan. Your lender will need to be reassured not only that you will make your monthly repayments, but also that you can afford them. In most instances, a home loan will last between 25 and 30 years and while it is impossible to predict your circumstances exactly this far in the future, your lender will use your previous credit history and employment record to determine the level of risk associated with your home loan. This will dictate how much the lender is prepared to loan you, and the rate of interest which you will need to pay.
While the prospect of taking on such a large financial commitment can be daunting, there are some definite advantages to choosing a home loan to finance your property purchase.
Death and taxes are said to be the only two certainties in life, but when it comes to securing a home loan, there are a couple of tax benefits. The largest tax break comes in the form of a deduction based on the interest that you pay on your mortgage. Currently you can write off interest on up to a $500,000 loan if you are a single tax filer, or up to a $1million if you file your taxes jointly. This can be particularly beneficial in the early years of your mortgage as the majority of what you pay each month is applied to interest as opposed to the principal loan.
There are several other tax deductions that you may be able to benefit from. These include:
- Property tax deduction, which could save you around $2,000 annually.
- Points deduction. Some home loan borrowers pay points on their mortgage in exchange for a reduced interest rate. These can be deducted from your tax.
- Private mortgage insurance (PMI) deduction. Currently, you can take a PMI deduction if you meet certain income requirements.
Lower interest rates
As we have explained, the exact interest rate you will pay will depend on your individual circumstances and credit score. However, virtually all home loans have significantly lower interest rates than other types of lending, for example, vehicle personal loans. Combined with the longer period of the home loan, this enables a much wider demographic of people to have the opportunity to own their own property.
Capital appreciation / positive equity
Another major advantage of a home loan is that it gives you the chance to cover the cost of your interest or even make money if the value of your property goes up. Many people have been able to accumulate enough equity in their home to be much more financially stable in their future. This additional equity is also useful to put towards future home purchases, enabling you to move up the property ladder.
If you would like to learn more about the advantages of a home loan, our dedicated and experienced team would be delighted to talk you through them. Please don’t hesitate to get in touch with us to discuss your individual circumstances.