Greek philosopher Heraclitus once said “the only constant is change.” As much as we would like things to remain the same – our babies to stay little, our waistlines to stay small, our mortgage rates to remain low – they never do, or will. This week’s Primary Mortgage Market Survey is out and rates are both higher and lower than last week. It just goes to show how quickly these crazy low rates can change. If you’re not refinancing into a lower rate, you may miss out on your opportunity. There is never going to be a better time, because tomorrow never comes.
Homeownership comes with a lot of advantages, especially when it comes to tax time. Make sure you’re not missing out on important home-related tax deductions. As always, please consult your tax advisor to find out which deductions apply to you.
Deducting Mortgage Interest
The interest you pay on a home mortgage is usually tax-deductible. You are allowed to deduct interest on multiple mortgages, as long as they add up to less than $1 million. The one criteria being that the money was used for buying, building or improving a home.
Every year, you should receive a “Form 1098” from your lender which details how much mortgage interest you paid. To claim this deduction, you need to fill out “Schedule A”, under “itemized deductions” to record your interest deduction.
Home mortgage interest deductions can also include late payment charges and pre-payment penalties. The only requirement is that they were not for a specific service received in connection with your home loan.
Deducting Real Estate Taxes
Real estate taxes are also tax-deductible. Your interest statement should list the amount of real estate taxes you paid if your taxes and homeowners insurance were placed in an escrow account when you closed on your mortgage. If your real estate taxes aren’t included on the statement, review your cancelled checks to figure out the total amount of real estate taxes paid.
Deducting Mortgage Discount Points Paid on a Purchase
The points you pay on a loan for a home purchase are tax-deductible for the year you made the purchase. You can deduct the points you paid as well as those a seller paid on your behalf (see next item) if you meet the following criteria:
- The loan is secured by your primary residence;
- The loan was used to buy, improve or build the home;
- Paying points is a common practice in the seller’s geographic area;
- The points are calculated as a percentage of the loan principal ;
- The points are clearly outlined on the buyer’s settlement statement; and
- The amount of cash you put into the purchase of your home (down payment, closing costs, etc.) is at least equal to the amount you were charged for the points you paid on the loan.
Deducting Seller Concessions
Sometimes, the seller will contribute money to the buyer to help cover the buyer’s loan closing costs. The average concession is 3% of the sales price (with less than a 10% down payment).
Seller concessions can go towards buying down the interest rate, closing costs, discount points, and pre-paid items such as per diem interest, escrows and tax pro-rations. Again, seller-paid points are tax-deductible.
Deducting Loan Points Paid on a Refinance
If you refinanced in the last year, you may be able to deduct any points you paid to buy down the mortgage rate. These points must be deducted proportionately over the life of the loan. For example, if you took out a 30-year mortgage, you would deduct 1/30th of the points each tax year.
Many homeowners have overlooked an important tax opportunity. If you have refinanced more than once, you can deduct unclaimed points from an earlier refinance. Let’s take an example:
You refinanced in 2003 and paid points. You then deducted 1/30th of those points in 2003 and 2004. However, rates continued to drop, so you decided to refinance again in 2005, paying off the 2003 loan. The remaining points you have not yet deducted can now be deducted in 2005. You could also use this deduction if you sold the house in 2005, rather than refinancing.
Deducting Interest on a Home Equity Loan
Interest paid on a home equity loan or line of credit may be tax-deductible up to $100,000. However, the deduction may be limited if the combined amount of your second and first mortgages total more than the property’s actual value. For example:
Your home is worth $150,000 and you have a first mortgage for $125,000 and a home equity loan of $40,000. The two mortgages combined equal $165,000-that’s $15,000 more than the value of your home. That means you can only deduct the interest on your home equity loan up to the amount of $25,000 (the difference between your home’s value and your first mortgage).
If you still have questions, please call us at 800-251-9080 to talk to a refinance expert today. We can help you determine which refinancing option is best for your situation.