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What are the tax benefits of owning a home? Plenty of homeowners are asking themselves this right around now as they prepare to file their taxes.
You may recall the Tax Cuts and Jobs Actâthe most substantial overhaul to the U.S. tax code in more than 30 yearsâwent into effect on Jan. 1, 2018. The result was likely a big change to your taxes, especially the tax perks of homeownership.
While this revised tax code is still in effect today, the coronavirus has thrown a few curveballs. For one, the Internal Revenue Service has delayed filing season by about two weeks, which means it won’t start accepting or processing any 2020 tax year returns until Feb. 12, 2021. (So far at least, the filing deadline stands firm at the usual date, April 15.)
In addition to this delay, many might be wondering whether the new realities of COVID-19 life (like their work-from-home setup) might qualify for a tax deduction, or how other variables from unemployment to stimulus checks might affect their tax return this year.
Whatever questions you have,Â look no further than this complete guide to all the tax benefits of owning a home, where we run down all the tax breaks homeowners should be aware of when they file their 2020 taxes in 2021. Read on to make sure you aren’t missing anything that could save you money!
Tax break 1: Mortgage interest
Homeowners with a mortgage that went into effect before Dec. 15, 2017, can deduct interest on loans up to $1 million.
“However, for acquisition debt incurred after Dec. 15, 2017, homeowners can only deduct the interest on the first $750,000,” says Lee Reams Sr., chief content officer of TaxBuzz.
Why it’s important: The ability to deduct the interest on a mortgage continues to be a big benefit of owning a home. And the more recent your mortgage, the greater your tax savings.
“The way mortgage payments are amortized, the first payments are almost all interest,” says Wendy Connick, owner of Connick Financial Solutions. (See how your loan amortizes and how much you’re paying in interest with this online mortgage calculator.)
Note that the mortgage interest deduction is an itemized deduction. This means that for it to work in your favor, all of your itemized deductions (there are more below) need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled.
And note that those amounts just increased for the 2020 tax year. For individuals, the deduction is now $12,400 ($12,200 in 2019), and it’s $24,800 for married couples filing jointly ($24,400 in 2019), plus $1,300 for each spouse aged 65 or older. The deduction also went up to $18,650 for head of household ($18,350 in 2019), plus an additional $1,650 for those 65 or older.
As a result, only about 5% of taxpayers will itemize deductions this filing season, says Connick.
For some homeowners, itemizing simply may not be worth it. So when would itemizing work in your favor? As one example, if you’re a married couple under 65 who paid $20,000 in mortgage interest and $6,000 in state and local taxes, you would exceed the standard deduction and be able to reduce your taxable income by an additional $1,200 by itemizing.
Watch: Ready To Refinance? Ask These 5 Questions First
Tax break 2: Property taxes
This deduction is capped at $10,000 for those married filing jointly no matter how high the taxes are. (Here’s more info on how to calculate property taxes.)
Why it’s important: Taxpayers can take one $10,000 deduction, says Brian Ashcraft, director of compliance at Liberty Tax Service.
Just note that property taxes are on that itemized list of all of your deductions that must add up to more than your particular standard deductionÂ to be worth your while.
And remember that if you have a mortgage, your property taxes are built into your monthly payment.
Tax break 3: Private mortgage insurance
If you put less than 20% down on your home, odds are you’re paying private mortgage insurance, or PMI, which costs from 0.3% to 1.15% of your home loan.
But here’s some good news for PMI users: You can deduct the interest on this insurance thanks to the Mortgage Insurance Tax Deduction Act of 2019âaka the Setting Every Community Up for Retirement Enhancement (SECURE) Actâwhich reinstated certain deductions and credits for homeowners.
“These include the deduction for PMI,” says Laura Fogel, certified public accountant at Gonzalez and Associates in Massachusetts. (This credit is retroactive, so talk to your accountant to see if it makes sense to amend your 2018 or 2019 tax return in case you missed it in past years.)
Also note that this tax deduction is set to expire again after 2020 unless Congress decides to extend it in 2021.
Why it’s important: The PMI interest deduction is also an itemized deduction. But if you can take it, it might help push you over the $24,800 standard deduction for married couples under 65. And here’s how much you’ll save: If you make $100,000 and put down 5% on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and thus cut your taxable income by $1,500. Nice!
Tax break 4: Energy efficiency upgrades
The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016; however, two credits are still around (but not for long). The credits for solar electric and solar water-heating equipment are available through Dec. 31, 2021, says Josh Zimmelman, owner of Westwood Tax & Consulting, a New Yorkâbased accounting firm.
The SECURE Act also retroactively reinstated a $500 deduction for certain qualified energy-efficient upgrades “such as exterior windows, doors, and insulation,” says Fogel.
Why it’s important: You can still save a tidy sum on your solar energy. Andâbonus!âthis is a credit, so no worrying about itemizing here. However, the percentage of the credit varies based on the date of installation. For equipment installed between Jan. 1, 2020, and Dec. 31, 2020, 26% of the expenditure is eligible for the credit (down from 30% in 2019). That figure drops to 22% for installation between Jan. 1 and Dec. 31, 2021. As of now, the credit ends entirely after 2021.
Tax break 5: A home office
Good news for all self-employed people whose home office is the main place where they work: You can deduct $5 per square foot, up to 300 square feet, of office space, which amounts to a maximum deduction of $1,500.
For those who can take the deduction, understand that there are very strict rules on what constitutes a dedicated, fully deductible home office space. Here’s more on the much-misunderstood home office tax deduction.
The fine print: The bad news for everyone forced to work at home due to COVID-19? Unfortunately, if you are a W-2 employee, you’re not eligible for the home office deduction under the CARES Act even if you spent most of 2020 in your home office.
Tax break 6: Home improvements to age in place
To get this break, these home improvements will need to exceed 7.5% of your adjusted gross income. So if you make $60,000, this deduction kicks in only on money spent over $4,500.
The cost of these improvements can result in a nice tax break for many older homeowners who plan to age in place and add renovations such as wheelchair ramps or grab bars in bathrooms. Deductible improvements might also include widening doorways, lowering cabinets or electrical fixtures, and adding stair lifts.
The fine print: Youâll need a letter from your doctor to prove these changes were medically necessary.
Tax break 7: Interest on a home equity line of credit
If you have a home equity line of credit, or HELOC, the interest you pay on that loan is deductible only if that loan is used specifically to “buy, build, or improve a property,” according to the IRS. So you’ll save cash if your home’s crying out for a kitchen overhaul or half-bath. But you can’t use your home as a piggy bank to pay for college or throw a wedding.
The fine print: You can deduct only up to the $750,000 cap, and this is for the amount you pay in interest on your HELOC and mortgage combined. (And if you took out a HELOC before the new 2018 tax plan for anything besides improvements to your home, you cannot legally deduct the interest.)
The post 7 Tax Benefits of Owning a Home: A Complete Guide for Filing This Year appeared first on Real Estate News & Insights | realtor.comÂ®.
Once you decide to become a homeowner, itâs likely that you will need to take out a mortgage to purchase your new home. While the conclusion that you need a mortgage to finance your home is usually easy to arrive at, deciding which one is right for you can be overwhelming. One of the many decisions a prospective homebuyer must make is choosing between a 15-year versus 30-year mortgage.
From the names alone, itâs hard to tell which one is the better option. Under ideal circumstances, a 15-year mortgage mathematically makes sense as the better option. However, the path to homeownership is often far from ideal (and who are we kidding, under ideal circumstances weâd all have large sums of money to purchase a house in cash). So the better question for homebuyers to ask is which one is best for you?
To help you make the most informed financial decisions, we detail the differences between the 15-year and 30-year mortgage, the pros and cons of each, and options for which one is better based on your financial priorities.
The Difference Between 15-Year Vs. 30-Year Mortgages
The main difference between a 15-year and 30-year mortgage is the amount of time in which you promise to repay your loan, also known as the loan term.
The loan term of a mortgage has the ability to affect other aspects of your mortgage like interest rates and monthly payments. Loan terms come in a variety of lengths such as 10, 15, 20, and 30 years, but weâre discussing the two most common options here.
What Is a 15-Year Mortgage?
A 15-year mortgage is a mortgage thatâs meant to be paid in 15 years. This shorter loan term means that amortization, otherwise known as the gradual repayment of your loan, happens more quickly than other loan terms.
What Is a 30-Year Mortgage?
On the other hand, a 30-year mortgage is repaid in 30 years. This longer loan term means that amortization happens more slowly.
Pros and Cons of a 15-Year Mortgage
The shorter loan term of a 15-year mortgage means more money saved over time, but sacrifices affordability with higher monthly payments.
- Lower interest rates (often by a full percentage point!)
- Less money paid in interest over time
- Higher monthly payments
- Less affordability and flexibility
Pros and Cons of a 30-Year Mortgage
As the mortgage term chosen by the majority of American homebuyers, the longer 30-year loan term has the advantage of affordable monthly payments, but comes at the cost of more money paid over time in interest.
- Lower monthly payments
- More affordable and flexible
- Higher interest rates
- More money paid in interest over time
|â¢ Lower interest rates
â¢ Less money paid in interest over time
|â¢ Lower monthly payments
â¢ More affordable and flexible
|â¢ Higher monthly payments
â¢ Less affordability and flexibility
|â¢ Higher interest rates
â¢ More money paid in interest over time
Which Is Better For You?
Now with what you know about the pros and cons of each loan term, use that knowledge to match your financial priorities with the mortgage that is best for you.
Best to Save Money Over Time: 15-Year Mortgage
The 15-year mortgage may be best for those who wish to spend less on interest, have a generous income, and also have a reliable amount in savings. With a 15-year mortgage, your income would need to be enough to cover higher monthly mortgage payments among other living expenses, and ample savings are important to serve as a buffer in case of emergency.
Best for Monthly Affordability: 30-Year Mortgage
A 30-year mortgage may be best if youâre seeking stable and affordable monthly payments or wish for more flexibility in saving and spending your money over time. The longer loan term may also be the better option if you plan on purchasing property you couldnât normally afford to repay in just 15 years.
Best of Both: 30-Year Mortgage with Extra Payments
Want the best of both worlds? A good option to save on interest and have affordable monthly payments is to opt for a 30-year mortgage but make extra payments. You can still have the goal of paying off your mortgage in 15 or 20 years time on a 30-year mortgage, but this option can be more forgiving if life happens and you donât meet that goal. Before going this route, make sure to ask your lender about any prepayment penalties that may make interest savings from early payments obsolete.
As a prospective homebuyer, itâs important that you set yourself up for financial success. Fine-tuning your personal budget and diligently saving and paying off debtÂ help prepare you to take the next steps toward buying a new home. Doing your research and learning about mortgages also helps you make decisions in your best interest.
When picking a mortgage, always keep in mind what is financially realistic for you. If that means forgoing better savings on interest in the name of affordability, then remember that path still leads to homeownership. Try out these budget templates for your home or monthly expenses to help keep you on a good path to achieving your goals.
Sources: Consumer Financial Protection Bureau
The post 15-Year vs. 30-Year Mortgages: Which is Better? appeared first on MintLife Blog.
Just about everybody with a wallet is impacted by the Federal Reserve. That means youâhomeowners and prospective buyers. Whether you’re already nestled in to the house of your dreams or still looking to find it, you’ll probably want to track what happens to mortgage rates when the Fed cuts rates. When the Fed (as it’s commonly referred to) cuts its federal funds rateâthe rate banks charge each other to lend funds overnightâthe move could impact your mortgage costs.
The Fed’s overall goal when it cuts the federal funds rate is to stimulate the economy by spurring consumers to spend and borrow. This is good news if you are carrying debt because borrowing tends to become less expensive following a Fed rate cut (think: lower credit card APRs). But in the case of homeownership, what happens to mortgage rates when the Fed cuts rates can be a double-edged sword.
The connection between a Fed rate cut and mortgage rates isn’t so crystal clear because the federal funds rate doesn’t directly influence the rate on every type of home loan.
“Mortgage rates are formed by global market forces, and the Federal Reserve participates in those market forces but isn’t always the most important factor,” says Holden Lewis, who’s been covering the mortgage industry for nearly 20 years and is also a regular contributor to NerdWallet.
To understand which side of the sword you’re on, you’ll need an answer to the question, “How does a Fed rate cut affect mortgage rates?” Read on to find out if you stand to potentially gain on your mortgage in a low-rate environment:
How a fixed-rate mortgage movesâor doesn’t
A fixed-rate mortgage has an interest rate that remains the same for the entire length of the loan. If the Fed cuts rates, what happens to mortgage rates if you are an existing homeowner with a fixed-rate mortgage? Nothing should happen to your monthly payments following a Fed rate cut because your rate has already been locked in.
“For current homeowners with a fixed-rate mortgage set at a previous higher level, the existing mortgage rate stays put,” Lewis says.
If you’re a prospective homebuyer shopping around for a fixed-rate mortgage, the news of what happens to mortgage rates when the Fed cuts rates may be different.
For prospective homebuyers: If the Fed cuts its interest rate and the 10-year Treasury yield is similarly tracking, the rates on fixed-rate mortgages could drop, “and you could lock in interest at a lower fixed rate than before.”
The federal funds rate does not directly impact the rates on this type of home loan, so a Fed rate cut doesn’t guarantee that lenders will start offering lower mortgage rates. However, the 10-year Treasury yield does tend to influence fixed-rate mortgages, and this yield often moves in the same direction as the federal funds rate.
If the Fed cuts its interest rate and the 10-year Treasury yield is similarly tracking, the rates on fixed-rate mortgages could drop, “and you could lock in interest at a lower fixed rate than before,” Lewis says. It’s also possible that rates on fixed mortgages will not fall following a Fed rate cut.
How an adjustable-rate mortgage follows the Fed
An adjustable-rate mortgage (commonly referred to as an ARM) is a home loan with an interest rate that can fluctuate periodicallyâalso known as variable rate. There is often a fixed period of time during which the initial rate stays the same, and then it adjusts on a regular interval. (For instance, with a 5/1 ARM, the initial rate stays locked in for five years and then adjusts each year thereafter.)
So back to the burning question: If the Fed cuts rates, what happens to mortgage rates? The rates on an ARM typically track with the index that the loan uses, e.g., the prime rate, which is in turn influenced by the federal funds rate.
“If the Fed drops its rate during the adjustment period, you could see your interest rate go down and, in turn, see lower monthly payments,” says Emily Stroud, financial advisor and founder of Stroud Financial Management.
Since ARMs are often adjusted annually after the fixed period, you may not feel the impact of the Fed rate cut until your ARM’s next annual loan adjustment. For instance, if there is one (or more) rate cuts during the course of a year, the savings from the rate reduction(s) would hit all at once at the time of your reset.
If the Fed cuts rates, what happens to mortgage rates for prospective homebuyers considering an ARM? An even lower rate could be in your futureâat least for a specific period of time.
“If you’re looking for a shorter-term mortgage, say a 5/1 ARM, you could save considerably on interest,” Stroud says. That’s because the introductory rate of an ARM is usually lower than the rate of a fixed-rate mortgage, Stroud explains. Add that benefit to lower rates fueled by a Fed rate cut and an ARM could be enticing if it supports your financial goals and plans.
“If the Fed drops its rate during the adjustment period, you could see your interest rate go down and, in turn, see lower monthly payments.”
Benefits of other variable-rate loans following a rate cut
If you have a Fed rate cut and mortgage rates on your mind and are a borrower with other types of variable-rate loans, you could be impacted following a Fed rate cut. Borrowers with variable-rate home equity lines of credit (HELOCs) and adjustable-rate Federal Housing Administration loans (FHA ARMs), for example, may end up ahead of the curve when the Fed cuts its rate, according to Lewis:
- A HELOC is typically a “second mortgage” that provides you access to cash for goals like debt consolidation or home improvement and is a revolving line of credit, using your home as collateral. A Fed rate cut could result in lower rates for variable-rate HELOCs that track with the prime rate. If you are an existing homeowner with a HELOC, you could see your monthly payments drop following a Fed rate cut.
- An FHA ARM is an ARM insured by the federal government. If you’re wondering about a Fed rate cut and mortgage rates, know that this type of mortgage behaves much like a conventional variable-rate loan when the Fed cuts it rate, Lewis says. Existing homeowners with an FHA ARM could see a rate drop, and prospective homebuyers could also benefit from lower rates following a Fed rate cut.
Refinancing: A silver lining for fixed rates
When it comes to a Fed rate cut and mortgage rates, refinancing to a lower rate could be an option if you have an existing fixed-rate loan. The process of refinancing replaces an existing loan with a new one that pays off your old loan’s debt. You then make payments on your new loan, so the goal is to refinance at a time when you can get better terms.
“If someone buys a home one year and a Fed rate cut results in a mortgage rate reduction, for example, it presents a real refinance opportunity for homeowners,” Lewis says. âJust a small percentage point reduction could possibly trim a few hundred bucks from your monthly payments.”
Before a refinancing decision is made based on a Fed rate cut and mortgage rates, you should consider any upfront costs and fees associated with refinancing to ensure they don’t offset any potential savings.
Managing your finances as a homeowner
You might be expecting some savings in your future now that you’re armed with information on what happens to mortgage rates when the Fed cuts rates. Whether you’re a homebuyer and financing your new home is going to cost you less with a lower interest rate, or you’re an existing homeowner with an ARM that may come with lower monthly payments, Stroud suggests to use any uncovered savings wisely.
“Invest that cash back into your property, pay down your home equity debt or borrow with it,” she says.
While news of a Fed rate cut may entice you to analyze how your mortgage will be impacted, remember there are many factors that help to determine your mortgage rate, including your credit score, home price, loan amount and down payment. The Fed’s actions are only one piece of a larger equation.
Even though the Fed’s rate decisions may dominate headlines immediately following a rate cut, your home is a long-term investment and one you’ll likely maintain for years. To best prepare for what happens to mortgage rates when the Fed cuts rates is to always manage your home finances responsibly and be sure to make choices that will lead you down the right path based on your financial goals.
*This should not be considered tax or investment advice. Please consult a financial planner or tax advisor if you have questions.
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The post What Happens to Mortgage Rates When the Fed Cuts Rates? appeared first on Discover Bank – Banking Topics Blog.
At the beginning of any new year, the subject of homeownership often comes up. And after a year of remaining largely inside, you might even more inclined to take the plunge. And with interest rates at historic lows, you might be able to score great terms.
There are a lot of things to consider before you jump into the homeownership pool, but one thing you definitely want is a good credit score.
Check out all the answers from our credit card experts.
Ask Steve a question.
What credit score is needed to buy a house?
In general terms, the bare minimum score required to get a mortgage is 500. But 500 is not a good score and often points to underlying problems in a personâs financial past. It could also be that a 500 score may simply be the result of a very thin file. While a loan might be available with a 500 credit score and at least 10% down, I suggest waiting until you have at least a 620 FICO score before attempting to buy a home.
See related:Â Can you get approved for a home loan with a credit score?
Scores of 620 to 640 are generally the accepted âminimumâ score required for most types of loans. But, the lower the score, the worse the terms you will qualify for, and scores under 640 are not going to get you the best terms. This is true for any financial product, but especially mortgages.
Can you pay your mortgage with a credit card?
What credit scores do mortgage lenders use?
FICO scores arenât the only credit scores, but they are the most common. And, theyâre what most mortgage lenders will use to evaluate applications. But remember that FICO offers scores, depending on what lenders need. So the FICO score a credit card issuer uses will be different from the one a mortgage lender uses.
How to manage your credit when applying for a mortgage
I always recommend people give themselves six months to a year to get their credit in its best shape before shopping for a mortgage.
Check your creditÂ
Pull your credit reports from all three bureaus at AnnualCreditReport.com. Right now, you can access a free credit report from each bureau weekly. After April 2021, you will be able to access these free reports once a year. Â Look over each report carefully and identify any errors or problems you see.
Correct any errors
If there are errors, work with the bureau to have them corrected. This may take weeks or months, or even longer in the case of identity theft.
Fix any problems
If you see any derogatory marks, you will need to correct them to get the best terms. Any past due items or items you may have in collections will pull your score down and could result in a much higher interest rate or even an outright denial. Most derogatory marks stay on your credit for seven years, but they will have less of an impact on your score over time â assuming you make payments on time and keep any bills out of collections.
Keep your debt low
If youâre hoping to get a mortgage soon, youâll want to keep your debt as low as possible and pay off any existing balances because credit utilization accounts for 30% of your credit score.
Try not to open or close any accounts
Both opening and closing credit card accounts can lower your score. Usually, itâs only temporary, but when youâre looking for a mortgage, you want your score to be as good as possible. So unless you have a good reason to open or close an account, itâs best to wait.
Buying a house is one of the most important decisions you will make. Putting your best credit foot forward is vital to securing the best terms, which will likely be with you for years to come.
Remember to keep track of your score!
See related:Â Building a mortgage-worthy credit profile