What do I need to know about buying a home?

Your home is a probably the biggest purchase you will make in your lifetime. Like most homebuyers, you will probably seek the advice of your family, friends, co-workers, and online resource. But even with all of that advice, you may still be left wondering if buying a home is the right thing to do. To make an informed decision, you need to learn as much as possible about buying a home and about your own needs. The more you know the less daunting the process will be. The list below will help you keep track of the benefits of owning your own home.

Pride of ownership

Why do most Americans buy a home? Home ownership gives you and your family a sense of stability and security. Buying a home is an investment in your future. But owning your own home is more than that. It is the fulfillment of the American dream. It's pride of ownership. Home ownership means you can paint the walls any color you want, turn up the volume on your home stereo system, attach permanent fixtures, and decorate your home according to your own taste.

Long term investment

Historically, the real estate market has always moved in cycles, sometimes up, sometimes down. Real estate tends not to be correlated to your other financial investments over the long term. So as you build up your equity in the house, you also, in effect, contribute to your retirement nest egg. Over the long run, real estate has tended to consistently appreciate. In fact, many people view their home investment as a hedge against inflation.

Mortgage interest deduction

One of the things every homeowner enjoys about owning a home is a superb tax deduction. In fact, most tax rates favor homeowners. As long as your mortgage balance is lower than the price of your home, mortgage interest up to $1 million of mortgage loan is fully deductible on your tax return. Interest is the largest component of your mortgage payment usually the first 7-10 years of a 30 year mortgage.

Property tax deduction

When it's time to file yearly tax returns, there's another big benefit. Real estate property taxes paid for a first home and a vacation home are fully deductible for income tax purposes. Also first-time homebuyers can get valuable tax information from IRS Publication 530.

Capital gain exclusion

As long as you have lived in your home for two of the past five years, you can exclude profit from capital gains from your tax liability—up to $250,000 for an individual or $500,000 for a married couple. You don't have to buy a replacement home or move up to a more expensive one.

Mortgage reduction builds equity

Each month, part of your monthly payment is applied to the principal balance of your loan, and that reduces your overall obligation. This is called amortization. Here's how it works. The principal portion of your principal-and-interest payment increases slightly every month. It is lowest on your first payment and highest on your last payment. On average, each $100,000 of a mortgage will reduce in balance the first year by about $500 in principal, bringing that balance at the end of your first 12 months to $99,500.

Equity loans can save on taxes

Consumers who carry credit card balances cannot deduct the interest paid. And that can cost as much as 18% to 29% or more. On the other hand, equity loan interest rate is often much less, the rate is typically tied to the prime rate (which is 3.25% as of Jan 2010) and it is deductible. For many homeowners, it makes sense to pay off higher-interest debt with a home equity loan. You can borrow against your home's equity for a variety of reasons such as home improvement, college costs, medical expenses, or starting a new business. Keep in mind, though, that equity loans rules and guidelines will vary from state to state. Also, stay disciplined, don't overuse your credit cards and get yourself back into the same card debt hole you where in.