Tag Archives: home buyer

6 Financial Perks of Being a First-Time Homebuyer

From mortgage points to PMI, unlock the essential info about how homeownership affects your tax burden.

Hours after we closed on our first house, my husband and I sat in our empty new living room and stared at the walls. He was the first to speak, saying simply, “I thought it was painted.”

We learned a lot about that old house over the next 15 years. While we knew to expect some of the work, other tasks, such as needing to paint the walls, we figured out as we went along. One of the changes we didn’t anticipate was needing to make some adjustments to our tax forms.

The forms you fill out when you buy your house are just the beginning. We quickly understood that first-time homeowners have years of mortgage and insurance paperwork to look forward to. Then, of course, there are the taxes. To help you sort through that pile of paperwork and ensure you’re saving as much money as possible we did some research into tax benefits that can come from buying.

Six Tax Benefits for New Homeowners

1. You can deduct the interest you pay on your mortgage.

The home mortgage interest deduction is probably the best-known tax benefit for homeowners. This deduction allows you to deduct all the interest you pay toward your home mortgage with a few exceptions, including these big ones:

  • Your mortgage can’t be more than $1 million.
  • Your mortgage must be secured by your home (unsecured loans don’t count).
  • Your mortgage must be on a qualified home, meaning your main or second home (vacation homes count too).

Don’t assume that if you are married and file a joint tax return, you have to own your home together to claim the interest. For purposes of the deduction, the home can be owned by you, your spouse, or jointly. The deduction counts the same either way.

And don’t worry about keeping track of how much you’re paying in interest versus principal each month. At the end of the year, your lender should issue you a form 1098, which reports the amount of interest you’ve paid during the year.

Warning: Since, as a first-time homeowner, you pay more interest than principal in the first few years. That number can be fairly sobering.

2. You may be able to deduct points.

Points are essentially prepaid interest that you offer upfront at closing to improve the rate on your mortgage. The more points you pay, the better deal you get.

You can deduct points in the year you pay them if you meet certain criteria. Included in the list (and it’s a long one): Points must be paid on a loan secured by your main home, and that loan must be to purchase or build your main home.

Pro tip: Points that you pay must also be within the range of what’s expected where you live — unusual transactions may cause you to lose the deduction.

3. Depending on the year and your income level, you may be able to deduct PMI.

Private mortgage insurance, or PMI, protects the bank in the event you default. PMI may be required as a condition of a mortgage for first-time homebuyers, especially if they can’t afford a large down payment.

For most years, PMI is not generally deductible, but the specific rules around it change annually. In 2016, if you made less than $109, 000 a year as a household, you could claim a tax deduction for the cost of PMI for both their primary home and any vacation homes. Check to see if the PMI deduction is a possibility as you are working on your taxes.

4. Real estate taxes are deductible.

Real estate taxes are imposed by state or local governments on the value of your property. Most banks or other mortgage lenders will factor the cost of your real estate taxes into your mortgage and put those amounts into an escrow account.

You can’t deduct the amounts paid into the escrow, but you can deduct the amounts paid out of it to cover the taxes (you’ll see this amount on a form 1098 issued by your lender at the end of the year).

If you don’t escrow for real estate taxes, you’ll deduct what you pay out of pocket directly to the tax authority.

And don’t forget about those taxes you paid at settlement. If you reimburse the seller for taxes already paid for the year, you get to deduct those too.

Those amounts won’t show up on a form 1098; you’ll need to check your settlement sheet for the totals.

5. Your other tax deductions may matter more.

To take advantage of these tax benefits, you have to itemize your deductions on your tax return.

For most taxpayers, this is a huge shift: in many cases, you’re moving from a form 1040-EZ to a form 1040 to list expenses on Schedule A.

In addition to interest, points, and taxes, Schedule A is where you would report deductions for charitable donations, medical expenses, and unreimbursed job expenses.

For itemizing deductions to make good financial sense, you generally want to have more total deductions than the standard deduction (for 2015, it’s $6,300 for individuals and $12,600 for married couples). Most taxpayers don’t reach those numbers — unless they’re homeowners.

The home mortgage interest deduction, in particular, tends to tip most homeowners over the standard deduction amount, making those other deductions (such as medical expenses) that might otherwise go unclaimed more valuable.

6. You’ll get capital gains tax relief down the road.

I know you just bought your home, but admit it: Resale value is something you considered when you chose your home. And different from other investments for which you’re taxed on the full value of any gain, you can exclude some of the gain attributable to your home when you sell.

Under current law, you can avoid paying tax on up to $250,000 of gain ($500,000 for married filing jointly) so long as you have owned and lived in the property for two of the last five years (those years of owning and inhabiting don’t have to be consecutive).

Gain over that amount is taxed at capital gains rates, which are generally more favorable than ordinary income tax rates.

 

Post courtesy of trulia.com

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What’s Really Included In Closing Costs?

Expect property taxes, homeowners insurance, and lender’s costs to be part of your settlement-day tab.

With your house-hunting and lender searches now in the rearview mirror, you can start steering your way around the final bend that leads to the driveway of your new home: settlement day and closing. A few days before you meet with your real estate agent, a title company representative, and your loan officer for this joyous event, you should have received from the title company a copy of your closing documents. Read these documents carefully — they will include details on the closing costs that are due upon settlement.

  • What are closing costs?

    Closing costs are lender and third-party fees paid at the closing of a real estate transaction, and they can be financed as part of the deal or be paid upfront. They range from 2% to 5% of the purchase price of a home. (For those who buy a $150,000 home, for example, that would amount to between $3,000 and $7,500 in closing fees.) Understanding and educating yourself about these costs before settlement day arrives might help you avoid any headaches at the end of the deal.

  • What’s included in closing costs?

    Closing costs will cover both recurring and nonrecurring fees that are a part of your transaction. Recurring costs are ongoing expenses that you will continue to pay as a homeowner, with a portion due upon closing; nonrecurring fees are one-time fees associated with borrowing money and the services that were required to purchase the property.

    Recurring closing costs are placed in your escrow account, which you might view as a forced savings account for those upcoming home expenses you’ll be facing. They can vary, but the most common ones are property taxes (one to eight months’ worth, depending on when your home purchase coincided with the local tax billing cycle), homeowners insurance (the annual premium is typically due at closing, plus another two or three months’ worth of payments), and prepaid loan interest (for the number of days you’ll have the loan until its first payment is due). Also placed into escrow are costs for title insurance, which is considered a must because it protects you in case the seller doesn’t have full rights and warranties to the title of the property.

    Nonrecurring closing costs are fees paid to your lender and other professionals involved in the transaction. They include: any home inspection fees; any discount points you’re paying upfront to lower your interest rate; an origination fee, which is charged by the lender to process your loan; a document-prep fee, which covers the cost of preparing your loan file for processing; an appraisal fee, which covers the cost of a professional estimating the market value of the home; and a survey fee for verifying the home’s property lines. Also expect as nonrecurring costs: an underwriting fee for the cost of evaluating and verifying your loan application; a credit report fee for pulling your credit scores; title search and recording fees; and a wire-transfer fee for wiring funds from the lender to your escrow account.

  • How to prepare for closing costs

    The best time to study closing costs is when you’re shopping for a lender and can compare your desired loan amount with interest rates you’re offered (plus any discount points you might plan to pay upfront to lower those rates). Then use a closing-cost calculator to determine what your costs might be. The calculator will gauge your monthly mortgage payments, based on whether you’re financing the closing costs into your mortgage or whether you’ve decided to pay them upfront.

Homeownership 101: Are You Ready?

Owning your own home is part of the American dream. But it takes more than just dreaming of buying and maintaining a home. Before you take the plunge, here are some things to ask yourself.

Does it make sense to buy?

Buying instead of renting needs to make sense financially. To help you decide, play with Zillow’s Buy vs. Rent calculator to see how many years it will take before the cost of buying equals the cost of renting. It’s called the breakeven horizon, and it varies by area of the country.

If you plan to stay in your home past your breakeven horizon, then buying makes financial sense. If you think you’ll move earlier, then renting may be the way to go.

Are you financially ready?

Buying a house involves raising a down payment and paying a monthly mortgage, which lasts anywhere from 5 to 30 years, depending on the home loan you can afford and are offered. There are other costs as well, but let’s focus on the big money.

Down payment: It’s the lump sum you’ll pay upfront that funds equity in the property and proves to lenders that you’ve got skin in this homeowner game. Down payments vary. In the go-go days that led up to the housing collapse, some lenders dismissed the down payment altogether – and we see how well that ended. Today, 20 percent is preferred and often gets you the best rates, but some loans allow down payments as low as 3 percent. Sometimes parents or friends can offer help with the down payment. If you have a choice, take a gift rather than a loan, not only for obvious reasons, but because lenders will add that debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio, which generally can’t top 43 percent to qualify for a home loan.

Monthly mortgage payments: This is what you’ll pay each month. In most cases, a mortgage includes the loan principal and interest (both amortized over the life of the loan) plus homeowners insurance and property taxes (pro-rated). When credit was tight, getting a mortgage at any rate was reserved for only the most credit-worthy borrowers. Things have loosened, but lenders still want to know that you’re a responsible, gainfully employed and credit-worthy candidate.

Are you emotionally ready?

Owning a home is a huge commitment so before jumping in, consider if you are ready to make lots of decisions, from picking an agent to picking paint colors. Are you confident enough to select a neighborhood where you’ll want to stay for a while? And are you up for devoting the time and attention to maintaining a home? Weekends will disappear under chores like pulling weeds, cleaning gutters, shoveling snow, sealing counters and decks, and on and on. Taking care of your biggest investment can be gratifying but only if you’re ready.

Do you have the skills?

Your home will require regular maintenance and repair, and there’s no landlord to call for help. You’ll need some basic handyperson skills so you won’t go broke hiring a repair professional to remedy every odd sound or smell. Here are some things every homeowner should learn how to do:
• Change a toilet flapper
• Shut off the main water valve and outdoor faucets
• Change a furnace filter
• Clean gutters of debris
• Change smoke detector batteries
• Locate and flip breaker switches
• Locate studs to hang shelves
• Paint a room

Post courtesy of zillow.com

Fall Might Be the Best Time to Buy a Home: Here’s Why

Photo credit: Andy Dean Photography / shutterstock.com

Buying a house is one of the biggest investment a person can enter into. A home offers shelter and security to the family and a majority of people consider it a very important purchase. Buying a home comes with spending some good money towards it. For buyers, you are looking at getting the best house at the best possible price. A person who wants to buy a house should always ask himself the best time he or she will be able to get the best deal.

There is always a discussion about the time of the year best to buy a house. A good number of real estate expert believe that fall is the best time to buy a house. Below are the reasons why fall is the best time to buy a home:

1. Less competition.

Competition for houses during fall always drop off but the houses are still available for sale. Due to less competition, the buyers are in a great position to negotiate for the home prices.

2. Sellers are tired.

Most sellers who had placed their houses out for sale during the prime season of property sale are very exhausted in fall. After not having made a deal in the summer and winter, most sellers are always ready to get a deal at a possible price reduction. This favors the buyers.

3. More time with your real estate agent.

There are always fewer buyers during fall meaning a buyer at that time has the full attention of the real estate agents compared to summer or winter period. A person is able to ask questions with the real estate agent and get clarifications easily.

4. There are home improvement bargains.

There will be some improvement needed when you buy a house. It is always good to coordinate the house purchase with home improvement. It is said that fall is the best time to buy most household goods. It is important to take advantage of the low prices during this time.

5. Holidays around the corner.

Most sellers are not only worn out from the summer sale but they are looking forward to holidays. This preholiday time always affects the willingness of the sellers to dispose of their property.

6. Year-end tax credit.

It is always necessary to understand the advantages of having a home in regards to a person’s income tax. By buying a house, a person will be able to qualify for tax deductions.

In conclusion, it is not just about buying a house, it is more about getting a house at a good deal. Knowing the right time to purchase a house is very important for a potential home buyer.