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How to Deduct Your Mortgage Interest and Equity Loan Costs

September 18, 2014

Mortgage Tax Deduction

 

Written by: Richard Koreto for Client Direct


This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

 

Deducting mortgage interest is a great tax benefit that can make home ownership more affordable. Your first mortgage isn’t the only loan that qualifies, either. In many cases, you can also deduct interest on home equity loans, second mortgages, and home equity lines of credit, or HELOCs.

You need to itemize your return to reap the benefits of these deductions. Calculations can be complicated, so consult a tax adviser.

Know your loan limits

A good place to check out what you can deduct before you borrow is the chart on page 3 of IRS Publication 936. It’ll walk you through the requirements you must meet to deduct all of your home loan interest.

The first hurdle you’ll run into is the total amount of your loan or loans. In general, individuals and couples filing jointly can deduct interest on loans up to $1 million ($500,000 if you’re married and filing separately). The money must have been used for acquisition costs — that is the cost to buy, build, or substantially improve a home, explains Scott O’Sullivan, a certified public accountant with Margolin, Winer & Evens in Garden City, N.Y. Any interest paid on loan amounts above the $1 million threshold isn’t deductible.

The same $1 million limit applies whether you have one home or two. Buying a vacation home doesn’t double your loan limits. And two homes is the max; you can’t deduct a mortgage for a third home. If you have a mortgage you took out before Oct. 13, 1987, you have fewer restrictions on claiming a full deduction. The calculations for “grandfathered debt” can get complex, so get help from a tax professional or refer to IRS Publication 936.

Whatever you do, don’t forget that you can also deduct the points and fees associated with a first or second mortgage when you initially buy your home, says Jeff Rattiner, a CPA with JR Financial Group in Centennial, Colo. If you refinance the same house, you have to deduct those costs over the entire term of the loan. If you refinance again, you can deduct all the costs from the earlier refi in the year you take out the new loan.

Spend loan proceeds wisely

The other limitation comes into play when you take out a home equity loan or HELOC, even if you don’t use the proceeds to buy, build, or improve your home. In that case, you can deduct interest on up to $100,000 ($50,000 if married filing separately) on outstanding home equity debt. This loan limit also applies in a cash-out refi, in which you refinance and take out part of the equity you’ve built up as cash, says John R. Lieberman, a CPA with Perelson Weiner in New York City.

That means if you decide to take out a $115,000 home equity loan to buy that Porsche, you can deduct the interest on the first $100,000 but not on the $15,000 that exceeds the limit. Use the same $115,000 to add a new bedroom, however, and the full amount is allowable under the $1 million cap. Keep in mind, though, that the $115,000 gets added into the pot of whatever else you owe on your other home loans. In many cases, points and loan origination costs for HELOCs are deductible.

Consider this simplified scenario: You borrow $250,000 against your home at 8% interest. That means you’ll pay $20,000 in interest the first year. Spend the $250,000 on home improvements, and all of the interest is deductible. Spend $150,000 on improvements and $100,000 on your kids’ college tuition, and all the interest is still deductible.

But spend $100,000 on improvements and $150,000 on tuition, and the improvement outlays are deductible, though $50,000 of the tuition expense isn’t. That’ll cost you $4,000 in interest deductions. Preserve the $4,000 deduction by coming up with the extra money for tuition from another source, perhaps a low-interest student loan or by borrowing from a retirement plan. For someone in a 25% bracket, a $4,000 deduction lowers taxes by $1,000, plus applicable state income taxes.

Beware the dreaded AMT

Even if you’ve followed all the loan limit rules, you can still get stuck paying tax on mortgage interest. How come? It’s all thanks to the Alternative Minimum Tax. Congress created the AMT, which limits or eliminates many deductions, as a way to keep the wealthy from dodging their fair share of taxes.

Calculating the AMT can be complex, but if you make more than $75,000 and have several kids or other deductions, you might well be subject to it. Problem is, if you fall into the AMT group, you may not be able to deduct interest on a home equity loan, even if the loan falls within the $1 million/$100,000 limit. If you’re subject to the AMT and borrow money against the value of your home, you’ll have to use it to buy, build, or improve your place, or you may not have a chance to deduct the interest, says Rattiner, the Colorado CPA.

Consider me your resource for all things real estate!  Selling, buying, upsizing, downsizing, relocating, investing, vendor referrals, shoulder to cry on during renovations and more.  Just send me an email or call me at 619-888-2117.

 

School or Pool – Which factors more for home buyers

September 11, 2014

Consider me your resource for all things real estate!  Selling, buying, upsizing, downsizing, relocating, investing, vendor referrals, shoulder to cry on during renovations and more.  Just send me an email or call me at 619-888-2117.

 

SchoolOrPool

Real Estate @ a Glance: August 2014 Edition

September 2, 2014

 

Here is the most recent information on the San Diego housing market. For specific information on your neighborhood or a market analysis on your home, please send me an email or call me at 619-888-2117.

Reportable Period :: JULY 2014 :: SAN DIEGO ASSOCIATION OF REALTORS®

Although low supply and tight credit standards are still hurdles to recovery, prices continue to rise in most local areas. Job growth has strengthened lately, but wage growth has not kept pace with the price gains we have seen. Buoyed by stable and continuously lower interest rates, affordability is still historically high yet below its all-time peak. Rising inventory levels will lead to more choices for qualified buyers, but as the summer reaches toward fall, the prospect of more homes coming on the market begins to wane.

Closed Sales: 2, 745

Median Sold Price:  $456, 995

Homes for Sale:  9,458

Average Days on the Market: 39

Housing Affordability Index: 30

For the comprehensive Market Overview infographic, click this link.

JulyMarketOverviewSDAR

 

 

Consider me your resource for all things real estate!  Selling, buying, upsizing, downsizing, relocating, investing, vendor referrals, shoulder to cry on during renovations and more.  Just send me an email or call me at 619-888-2117.

6 things homebuyers should avoid doing once they are preapproved for a mortgage

August 21, 2014
Do's and don'ts (Image via Shutterstock)

Do’s and don’ts (Image via Shutterstock)

 

Making other major purchases or applying for new credit can turn experience into big hassle

You have done the hard part in the homebuying process and chosen a lender and a real estate agent to work with. You have also gone out and found the home of your dreams! Best of all, your team has done a great job of negotiating the best deal for you.

Now, as a buyer, all you have to do is sit back and wait for your loan to close … right? Wrong!!

Getting a home loan these days is a very interactive process. I am always amazed by how many clients I work with who come to me unaware of all the pitfalls they face during the loan process. To help avoid any surprises while waiting for final approval, I provide my clients with a short list of “do’s and don’ts” to follow.

Let’s start with the “do’s” …

Do keep the process moving by responding to your loan officers’ requests for documentation as soon as possible.
Do make decisions as soon as is reasonably possible.
Do convey questions or concerns you have as they develop.
Do continue to make all of your rent or mortgage payments on time.
Do stay current on all other existing accounts.
Do continue to work your normal work schedule with no unplanned time off.
Do continue to use your credit as normal.
Do be prepared to explain any large deposits in your bank accounts.
Do enjoy purchasing your home but remain objective throughout the process to help make decisions that are best for you.
After you have been preapproved for your mortgage you will want to refrain from the following …

Do not make any major purchases (car, boat, jewelry, furniture, appliances, etc.).
Do not apply for any new credit (even if it says you are preapproved or “xxx days same as cash”).
Do not pay off charges or collections (unless directed by your loan officer to do so).
Do not make any changes to your credit profile.
Do not change bank accounts.
Do not make unusual deposits into your bank accounts or move money around from one account to another.
Follow these simple rules and you will help to make your loan closing as smooth and hassle-free as possible! Good luck!

(This article was originally published by Barbara Mooers on Active Rain. Barbara is a loan officer with Primary Residential Mortgage in Tacoma, Washington.)

 

Consider me your resource for all things real estate!  Selling, buying, upsizing, downsizing, relocating, investing, vendor referrals, shoulder to cry on during renovations and more.  Just send me an email or call me at 619-888-2117.

No Project Left Undone

August 14, 2014

Consider me your resource for all things real estate!  Selling, buying, upsizing, downsizing, relocating, investing, vendor referrals, shoulder to cry on during
renovations and more.
 Just send me an email or call me at 619-888-2117.

 

NoProjectLeftUndone

Top 10 Questions to Ask During an Open House

August 7, 2014

Top 10 Questions to Ask During an Open House

 

By: Virginia C. Mcguire, Trulia

 

Visiting an open house gives would-be buyers the opportunity to speak directly to the seller’s agent. And the best way to take advantage of this personal meeting is to be prepared. Get the inside scoop by asking these ten questions:

1. How many offers have been made?

Does the agent look suspiciously happy? They might have received word that an offer is coming in any minute. If they’ve received offers, they’ll probably be eager to tell you, in hopes that you’ll bid as well and drive the price up.

2. How stable has the price been?

Your agent can find out how many times the price has changed since it was first listed, but the seller’s agent will likely jump at the chance to explain why. Perhaps the price dropped because the seller has to move on a tight timeline. Info like this might even clue you in that the list price is somewhat flexible.

3. Why do the sellers want to move?

If the sellers are moving because the area is unsafe, the schools are terrible, or the neighbor practices the drums at midnight, their agent is unlikely to tell you. But ask this question anyway, and try to read between the lines.

4. How long has this property been on the market?

You can find this information yourself on Trulia, or by asking your agent to check the local multiple listing service, but the seller’s agent will be able to put this information in context. Perhaps it’s been on the market for a long time, but only because the sellers received an offer from a buyer whose financing fell through. Or, perhaps the house went on the market this week, but the sellers have had a lot of interest and expect it to sell quickly. All of this is useful when you’re deciding whether to make an offer.

5. What issues does the house come with?

The seller is required to tell potential buyers about any known structural problems or code violations. It’s standard to ask for a written seller’s disclosure, so request one – and if you’re lucky, a talkative agent might reveal more in person.

6. When was the house last updated?

Clearly visible updates, like new appliances or a fresh coat of paint, are easy to identify. However, features like the age of the roof and wiring which can’t be easily seen, are equally as important and need to be asked about.

7. How much do utilities cost?

Know what you’re getting into before you make an offer by asking to see recent utility bills. If you’re moving from an apartment into a house, you might be surprised at the impact utility bills have on your budget.

8. What’s the seller’s timeline?

Sometimes sellers choose a buyer’s offer simply because of timing. Perhaps they want to sell quickly, or delay the sale so their kids can finish the school year. The more you know about what the sellers want, the more easily you can work around it — and put together a tempting offer while getting a good deal on the price.

9. Where can I get a bite to eat?

Getting directions to a local eatery or coffee shop will tell you a lot about your neighborhood. If there’s a retail strip close by that locals frequent and feel proud of, chances are you’ll love it too.

10. What are the neighbors like?

Is the neighborhood kid-friendly? Are there lots of retired people? Is there a thriving bar scene on the weekends? Some people are fine doing their own thing and don’t require (or want) a tight-knit neighborhood community. But other people are much happier if they’re surrounded by kindred souls who are in a similar stage of life. The seller’s agent will be able to give valuable information about who you’d be rubbing shoulders with, if you choose to buy.

And don’t forget: while open houses are great venues to ask questions and listen, be careful not to give away more than you want about your own situation. Being discreet about your finances and how much you love the home will benefit you when it’s time to bargain for a good price.

Consider me your resource for all things real estate!  Selling, buying, upsizing, downsizing, relocating, investing, vendor referrals, shoulder to cry on during renovations and more.  Just send me an email or call me at 619-888-2117.

What Home Buyers and Sellers Should Know About Housing Affordability

August 1, 2014
Photo: Zillow

Photo: Zillow

By: Jill Hamilton, ClientDirect

 

Is it the right time to buy a house? Is it the right time to sell? How do you know when to jump into the real estate market? The answer is….it depends. There’s no single answer that applies to everyone. A host of factors come into play, including the economy in general, whether home prices are rising or falling, the inventory of available homes, and the state of your own financial outlook. If you’re thinking about buying or selling a home, here are some factors to consider.

For buyers:
Improving Economy, Rising Prices, and Eager Buyers:

The rebound in the economy means more competition for homes because people who have been renting or staying put in their homes are now jumping into the housing market. This translates into quick turnover on home sales, multiple bids, and sometimes, buyers bidding over the asking price. The boost in housing prices is also fueling competition from buyers who want to get into the market before prices get too high. Even though prices are rising, many still consider some homes underpriced since prices had dipped so low. And buyers are looking to make a move while houses are still relatively a good deal.
FHA Fee Changes:

Loans through the Federal Housing Administration (FHA) were historically the best bet for people with low to moderate incomes and not much money to put toward a down payment. Generally, private lenders require a 5% down payment, while FHA only requires 3.5%. However, with several changes to loan terms, FHA may no longer be the smartest option.
FHA loans require mortgage insurance, a fee tacked onto the loan that provides the lender some protection in case the borrower defaults on the loan. In the past, the borrower only needed to carry the insurance until the loan reached 78% of the original loan amount. Under the new rules, the borrower is required to carry the insurance for the life of the loan.
The cost of mortgage insurance on FHA loans has also been on the rise, almost tripling since 2008. In 2013, the fee rose to 1.35% of the balance of the loan. Additionally, FHA loans require borrowers to pay an upfront fee of 1.75% when getting the loan. Between the upfront fee and the required mortgage insurance, saving up more for a down payment and getting a private mortgage may make more financial sense.
Beyond FHA:

Buyers with a low down payment have other options to consider. Fannie Mae HomePath loans, available only on Fannie Mae-owned properties, offer low down payments and no mortgage insurance requirement. Periodically, Fannie Mae also offers special deals in which they cover the buyer’s closing costs. There also loans available to people in various special circumstances. Veterans, for example, can get VA Mortgages, which offer good terms, low down payments, and easier qualification requirements. The USDA offers attractive mortgage terms to moderate-income families buying property in rural or semi-rural areas.
Check Other Affordability Programs:

The Good Neighbor Next Door program offers discounts of homes in “revitalization” areas of up to 50% for qualified fire fighters, law enforcement officers, EMTs, and teachers. Check with state and local housing agencies to see what programs are available in your area. Check http://www.usa.gov for links and other home buying help and information.
Mind Your Debt:

Having a large amount of debt in relation to your income will lower your chances of getting a loan with favorable terms, or even getting a loan at all. Private lenders generally have more stringent rules for debt-to-income ratio (DTI). There are two kinds of DTI–how much personal debt you can carry in relation to your income (e.g. car loans, student loans, child care expenses) and income versus the amount you will be spending on housing debt (e.g. mortgage payments, property taxes, insurance and so forth.) Lenders take both into consideration. Would-be borrowers who want private financing generally need to have less than 45% of their income going towards personal debts, while FHA will finance borrowers who have up to about 56% of their income allocated for debt payment. Borrowers can qualify for an FHA loan with up to 47% of their income slated for housing costs, while conventional lenders generally allow only up to 38-40%.

For Sellers:
Rising Home Prices:

House prices are rebounding from the downturn, and 2014 is shaping up to be a seller’s market. Rising home prices are a boon to sellers who can expect faster sales, multiple full-price offers and even offers above their asking price.
Starter Homes in Demand:

If you have a starter home and are looking to upsize, the market is especially in your favor. Starter homes are in short supply because during the economic downturn, people were buying and selling less frequently. Now that the economy is improving, there’s a lot of pent-up demand, especially for people looking for inexpensive housing or a starter home.
Fewer Underwater Mortgages, More Equity:

The nationwide trend of rising home prices means other good news for sellers. The boost in prices is finally lifting many homeowners from their underwater mortgages and giving others more equity in their homes. More equity means more owners will have the money for a down payment and closing costs if they’d like to move up to something pricier.

Time to Refinance?:

Rising prices will also raise the appraised value of many homes, meaning it may be a good time for homeowners to refinance. Higher appraisals may help you get more favorable terms on a first mortgage or refinance the rolling of a second mortgage into one stable, fixed-rate mortgage.

Consider me your resource for all things real estate!  Selling, buying, upsizing, downsizing, relocating, investing, vendor referrals, shoulder to cry on during renovations and more.  Just send me an email or call me at 619-888-2117.

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