Mortgage Tips & Traps

If you are thinking of buying a home for the first time, it is common to have reservations about taking this big step.  But while it’s a big step, making the switch from renting to owning your own home can be a very smart step.  Here are some reasons why:

Pride of Ownership: This is the number one reason people yearn to own a home. It means you can paint the walls any color you desire, turn up the volume on your CD player, attach permanent fixtures and decorate your home according to your own taste. In addition, home ownership gives you and your family a sense of stability and security and you can feel proud about the investment you’re making in your future.

Mortgage Payments Build Equity: Part of each monthly payment is applied to the principal of your loan. This reduces your mortgage balance. The way “amortization” works, you’re always paying both on the interest and on the principal amount of the loan. Over time, more of your payment goes toward principal rather than the interest. This is how you build substantial equity in your home. When you rent, you are allowing your landlord to build equity.

 Mortgage Interest Deductions: Home ownership is a superb tax shelter and tax rates favor homeowners.  In most cases, mortgage interest on a primary residence and on a second home is fully deductible on your tax return. Interest is the largest component of your mortgage payment and can result in significant tax savings.

Property Tax Deductions: Real estate property taxes paid for a primary residence and a vacation home are fully deductible for income tax purposes. 

Mortgage Insurance Deductions: Depending upon your annual adjusted gross income, you may be able to deduct any mortgage insurance premiums.  This is important if you place less than 20% down on a home or obtain FHA Financing. 

Appreciation: Although real estate moves in cycles, sometimes up, sometimes down, over the years, real estate has consistently appreciated. Many people view their home as a long-term hedge against inflation.

Capital Gain Exclusion: As long as you have lived in your home for two of the past five years, you can exclude up to $250,000 for an individual or $500,000 for a married couple of profit from any capital gains from the sale of your home. You do not have to buy a replacement home or move up. There is no age restriction, and the "over-55" rule does not apply. You can exclude the above thresholds from taxes every 24 months, which means you could sell every two years and pocket your profit--subject to limitation--free from taxation.

Preferential Tax Treatment: If you have owned your home for more than one year and your profit on the sale of your home exceeds the allowable exclusion, that profit will be considered a capital asset, and will be taxed at a much lower rate than regular income. 

Equity Loans: Consumers can borrow against a home's equity for a variety of reasons such as home improvement, college, medical or starting a new business. Paying off credit card debt is another good use of a home equity loan. Carrying credit card balances can mean paying as much as 18% to 22%— interest is not tax-deductible. The interest on home equity loans, however, is often much less and it is deductible.  Some state laws restrict home equity loans.