If you own a home, one of your first questions may revolve around how your home affects your tax filing. While there have been some changes in recent years, come tax time, it’s important to know exactly what qualifies as a deduction (and to consult with your tax advisor) so you can get the most out of your tax write-offs.* What Is the Mortgage Interest Deduction? A mortgage interest deduction is an itemized tax deduction that allows homeowners to deduct the interest paid on a loan used to buy, build, or improve a first or second home. Homeowners who purchased a home prior to December 15, 2017 can deduct interest on the first $1,000,000 of mortgage debt. For those who purchased a home after December 15, 2017, a deduction only applies to the first $750,000 of mortgage debt. How the Mortgage Interest Deduction Works There are many nuances to the mortgage interest deduction, so make sure you keep good records of the interest you’ve paid throughout the year. Here’s a look at some things to watch out for and know as you’re evaluating your deductions. As noted above, you can deduct all the interest you paid on up to $1,000,000 in a mortgage loan, but you can only deduct up to the first $750,000 of home loan debt if you purchased the property after December 15, 2017. So for example, if you bought a home in 2016 and you have $1,000,000 in debt on that home, you can deduct all of your mortgage interest. However, if you bought a home for the same cost in 2018, you can only deduct interest on $750,000 according to the 2017 Tax Cuts and Jobs Act. However, there is an exception to the new limit. If you entered into a written contract for a property before December 15, 2017 and closed on the property before April 1, 2018, you are exempt and can deduct your interest on up to $1,000,000 in mortgage debt. What Qualifies As Mortgage Interest? The type of mortgage in question (i.e., a first mortgage, second mortgage, or a Home Equity Loan) and what type of property it covers, such as your primary residence versus a rental or investment property, can affect how your mortgage interest deduction works, so you’ll want to know how it relates to your specific case this year. For a complete list of rules and regulations, make sure to check out IRS Publication 936. Here is a brief overview of a few common scenarios below. Mortgage Interest For Your Home In order to deduct the mortgage interest on your home, you must meet a few qualifications. First of all, the home must be a house, apartment, condo, co-op, houseboat, mobile home, or trailer, and it must have sleeping, cooking, and bathroom facilities. The home itself must be collateral for a mortgage loan. If you receive a nontaxable housing allowance via the military or because you’ve done ministry work, you can still deduct interest. If you have taken out another mortgage to buy out a partner in a divorce as part of a mortgage buyout, you can also deduct the interest on that mortgage. Mortgage Interest For Your Second Home You can deduct mortgage interest on your second home, but in order to do so, there are a few rules. You don’t have to use the home during the year, but the home must be collateral for a loan. Also, if you rent out the home and receive rental income on the property, you must be in the house for more than 14 days or more than 10% of the days the home is rented, whichever is longer. Any Points Paid On Your Mortgage If you paid points on your mortgage loan as a way to pay down the amount of your loan interest, you can deduct these either all at once, or over the course of the loan, but there are a few requirements. The loan must be for your primary home, and paying discount points must be a regular practice where you live. Also be aware of the interest rates on the points, and note that they can’t have also been used for closing costs. Your down payment must be higher than your points, and the points must be calculated as a percentage of the loan. Home Equity Loan Interest The interest on your home equity loan is only deductible if you are using the loan to make significant repairs to your property. If you are using the loan for another purpose — a large purchase, paying down debt, etc. — it is not deductible. Late Payment Charges On Your Mortgage If you’re late making a mortgage payment and are charged a late fee, this additional cost counts as part of the mortgage interest deduction. Prepayment Penalties For some lenders, paying off your loan early can result in a prepayment penalty (not however, when you have a loan with PennyMac) because lenders want to ensure they’re getting interest income. If you are charged a prepayment penalty for any reason, you are allowed to deduct this as part of your mortgage interest deduction. What You’re Not Able to Deduct Not all extra costs associated with a mortgage are deductible. Here’s a look at what doesn’t qualify. Mortgage insurance premiums Homeowners insurance Any interest accrued on a reverse mortgage Down payments, deposits, or forfeited earnest money Title insurance Extra principal payments made on your mortgage Settlement costs (typically) How to Claim Your Mortgage Interest Deduction in 2019 Getting ready to prepare your taxes and want to make sure you’re taking full advantage of your mortgage interest deduction this year? It’s important to make sure all your paperwork is in order and follow these steps to take full advantage of the deduction. Look Out For Form 1098 This form shows how much you paid in mortgage interest and any points for the tax year. Your lender will send you the form if you paid $600 or more in mortgage interest, and they will also send a copy to the IRS to match up with your return. This form may also show you the amount of interest you’ve paid on your home loan to date. Can’t find it or not sure if you received it at all? Just contact your lender, and they can provide you with the amount of mortgage interest you paid for the year. Itemize Your Taxes If you want to take advantage of the mortgage interest deduction, you’ll need to itemize your deductions instead of using the standard deduction. Make sure it makes sense to itemize your deductions, as the goal is to take the highest possible deduction available to you. Instances Where You Can Claim the Mortgage Interest Deduction There are some scenarios where you can still claim the deduction even if your situation doesn’t fit the standard requirements exactly. Just make sure you’re keeping extremely accurate records of all of your property costs throughout the year, as well as square footage used for spaces like rentals and home offices, as things can get even more complicated. Here are some cases that would allow you to still claim the deduction. The home was a timeshare You rented out part of your home. You had a home office. (Make sure you track the square footage, and you may even be able to claim an additional deduction using Schedule C.) The home was an apartment co-op. Your home was under construction. Your home was destroyed within the applicable tax year. You and a partner split and you’re now paying a mortgage on a home you both own. Mortgage Interest Deduction 2018 The 2018 U.S. tax bill made significant changes to the mortgage interest tax deduction, as well as other updates for homeowners. Mortgage Tax Bill Changes The mortgage interest deduction allows homeowners to deduct part of the cost of their mortgage on their taxes. The 2018 tax plan now limits the portion of a mortgage on which you can deduct interest to $750,000, as compared to the previous limit of $1 million. Homeowners with mortgages that existed prior to the bill’s passage can continue to receive the current deduction. Property Tax Deduction Changes When looking at the 2018 tax changes, the focus was typically on the mortgage interest deduction changes. The bill has another aspect that affects homeowners: With the changes in property tax deductions, the 2018 tax plan has a limit of $10,000 on the amount of state and local property taxes that can be deducted from a homeowner’s federal taxes. Know Your Tax Advantages With Homeownership Whether you already own a home or are taking your very first steps towards making a smart investment in a home to call your own, be sure to stay in the know about all the potential tax advantages, along with the many other benefits of homeownership. Ready to purchase or refinance and want to know what your options are? Call us now for your free mortgage consultation or apply online to get started on your pre-approval. *Consult a tax adviser for further information regarding the deductibility of interest and charges.
After exiting mortgage forbearance, it’s possible to refinance for a lower interest rate and monthly payment. But there are special rules to be aware of.
Today’s mortgage and refinance rates Average mortgage rates inched lower yesterday, returning them to their recent all-time low. That had looked unlikely first thing, but markets turned tail later that […]
The average U.S. mortgage rate for a 30-year fixed loan fell two basis points this week to 2.65% â the lowest rate in the surveyâs near 50-year history.
The post Mortgage rates drop even lower to new record of 2.65% appeared first on HousingWire.
The VA cash-out refinance program enables veterans and active-duty service members to tap into their homeâs equity and, depending on current refinance interest rates, lower their interest rate at the […]
Should I refinance my student loans? It depends on your situation. But a common reason for people to refinance their student loans is that they want to pay less interest. Even a small decrease in the rate could save you a lot of money over the life of the loan and ultimately help you pay …
The post Should I Refinance My Student Loans? appeared first on GrowthRapidly.
“Is it better to pay off student loans or a mortgage first? I’m asking for my brother, who took out $80,000 in student loans about 20 years ago and has only paid off about $10,000. He recently bought a home in Southern California and took out a 30-year mortgage that might be as much as $400,000. I don’t know the interest rates he’s paying on these debts. I think he should pay off his student loans first because the total debt is smaller, older, and can’t be discharged in a bankruptcy. What do you think?”
Thanks for your question, Maya! This dilemma is common, especially now that most federal student loans are in automatic forbearance from March 13 to September 30, 2020, due to coronavirus-related economic relief. That means millions of student loan borrowers suddenly have the option to stop making payments without adverse financial consequences, such as hurting their credit or getting charged additional interest or fees.
If you have qualifying student loans and you're dealing with financial hardship due to the pandemic or another challenge, you may be grateful to have your payments suspended. But if your finances are in good shape and you don’t have any dangerous debts, such as high-rate credit cards or loans, you may be wondering what to do with the extra money. Should you send it to your student loans despite the forbearance, to your mortgage, or to some other account?
RELATED: 10 Things Student Loan Borrowers Should Know About Coronavirus Relief
6 Steps to Decide Whether to Pay Off Student Loans or a Mortgage First
Let's take a look at how to prioritize your finances and use your resources wisely during the pandemic. This six-step plan will help you make smart decisions and reach your financial goals as quickly as possible.
1. Check your emergency savings
While many people begin by asking which debt to pay off first, that’s not necessarily the right question. Instead, zoom out and consider your financial life's big picture. An excellent place to start is to review your emergency savings.
If you’ve suffered the loss of a job or business income during the pandemic, you’re probably very familiar with how much or how little savings you have. But if you haven’t thought about your cash reserve lately, it’s time to reevaluate it.
Having emergency money is so important because it keeps you from going into debt in the first place. It keeps you safe during a rough financial patch or if you have a significant unexpected expense, such as a car repair or a medical bill.
How much emergency savings you need is different for everyone. If you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents and plenty of job opportunities.
If you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents and plenty of job opportunities.
A good rule of thumb is to accumulate at least 10% of your annual gross income as a cash reserve. For instance, if you earn $50,000, make a goal to maintain at least $5,000 in your emergency fund.
You might use another standard formula based on average monthly living expenses: Add up your essential costs, such as food, housing, insurance, and transportation, and multiply the total by a reasonable period, such as three to six months. For example, if your living expenses are $3,000 a month and you want a three-month reserve, you need a cash cushion of $9,000.
If you have zero savings, start with a small goal, such as saving 1 to 2% of your income each year. Or you could start with a tiny target like $500 or $1,000 and increase it each year until you have a healthy amount of emergency money. In other words, it might take years to build up enough savings, and that’s okay—just get started!
Your financial well-being depends on having cash to meet your living expenses comfortably, not on paying a lender ahead of schedule.
Unless Maya’s brother has enough cash in the bank to sustain him and any dependent family members through a financial crisis that lasts for several months, I wouldn’t recommend paying off student loans or a mortgage early. Your financial well-being depends on having cash to meet your living expenses comfortably, not on paying a lender ahead of schedule.
If you have enough emergency savings to feel secure for your situation, keep reading. Working through the next four steps will help you decide whether to pay down your student loans or mortgage first.
2. Reach your retirement goals
In addition to saving for potential emergencies, it’s critical to save regularly for your retirement before paying down a student loan or mortgage early. So, if Maya’s brother isn’t contributing regularly to meet a retirement goal, that’s the next priority I’d recommend for him.
Consider this: If you invest $500 a month for 35 years and have an average 8% return, you’ll end up with an impressive retirement nest egg of more than $1.2 million! But if you wait until 10 years before retirement to start saving, you’d have to invest over $5,000 a month to have $1 million in the bank. When it comes to your retirement savings, procrastinating can make the difference between scraping by or have a comfortable lifestyle down the road.
When it comes to your retirement savings, procrastinating can make the difference between scraping by or have a comfortable lifestyle down the road.
A good rule of thumb is to invest at least 10% to 15% of your gross income for retirement. For instance, if you earn $50,000, make a goal to contribute at least $5,000 per year to a tax-advantaged retirement account, such as an IRA or a retirement plan at work, such as a 401(k) or 403(b).
For 2020, you can contribute up to $19,500, or $26,000 if you’re over age 50, to a workplace retirement account. Anyone with earned income (even the self-employed) can contribute up to $6,000 (or $7,000 if you’re over 50) to an IRA.
The earlier you make retirement savings a habit, the better. Not only does starting sooner give you more time to contribute money, but it leverages the power of compounding, which allows the growth in your account to earn additional interest. That’s when you’ll see your retirement account value mushroom!
3. Have the right insurance
In addition to building an emergency fund and saving for retirement, an essential part of taking control of your finances is having adequate insurance. Many people get into debt in the first place because they don’t have enough of the right kinds of coverage—or they don’t have any insurance at all.
Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn.
As your career progresses and your net worth increases, you’ll have more income and assets to protect from unexpected events. Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn.
Make sure you have enough health insurance to protect yourself and those you love from an illness or accident jeopardizing your financial security. Also, review your auto and home or renters insurance coverage. And by the way, if you rent and don’t have renters insurance, you need it. It’s a bargain for the protection you get; it only costs $185 per year on average.
And if you have family who would be hurt financially if you died, you need life insurance to protect them. If you’re in relatively good health, a term life insurance policy for $500,000 might only cost a couple of hundred dollars per year. You can get free quotes for many different types of insurance using sites like Bankrate.com or Policygenius.com.
If Maya’s brother is missing critical types of insurance for his lifestyle and family situation, getting it should come before paying off a student loan or mortgage early. It’s always a good idea to review your insurance needs with a reputable agent or a financial advisor who can make sure you aren’t exposed to too much financial risk.
4. Set other financial goals
But what about other goals you might have, such as saving for a child’s education, starting a business, or buying a home? These are wonderful if you can afford them once you’ve accounted for your emergency savings, retirement, and insurance needs.
Make a list of your financial dreams, what they cost, and how much you can afford to spend on them each month. If they’re more important to you than paying off student loans or a mortgage early, then you should fund them. But if you’re more determined to become completely debt-free, go for it!
5. Consider your opportunity costs
Once you’ve hit the financial targets we’ve covered so far, and you have money left over, it’s time to consider the opportunity costs of using it to pay off your student loans or mortgage. Your opportunity cost is the potential gain you’d miss if you used your money for another purpose, such as investing it.
A couple of benefits of both student loans and mortgages is that they come with low interest rates and tax deductions, making them relatively inexpensive. That’s why other high-interest debts, such as credit cards, personal loans, and auto loans, should always be paid off first. Those debts cost more in interest and don’t come with any money-saving tax deductions.
Especially in today’s low interest rate environment, it’s possible to get a significantly higher return even with a reasonably conservative investment portfolio.
But many people overlook the ability to invest extra money and get a higher return. For instance, if you pay off the mortgage, you’d receive a 4% guaranteed return. But if you can get 6% on an investment portfolio, you may come out ahead.
Especially in today’s low-interest-rate environment, it’s possible to get a significantly higher return even with a reasonably conservative investment portfolio. The downside of investing extra money, instead of using it to pay down a student loan or mortgage, is that investment returns are not guaranteed.
If you decide an early payoff is right for you, keep reading. We’ll review several factors to help you know which type of loan to focus on first.
6. Compare your student loans and mortgage
Once you have only student loans and a mortgage and you’ve decided to prepay one of them, consider these factors.
The interest rates of your loans. As I mentioned, you may be eligible to claim a mortgage interest tax deduction and a student loan interest deduction. How much savings these deductions give you depends on your income and whether you use Schedule A to itemize deductions on your tax return. If you claim either type of deduction, it could reduce your after-tax interest rate by about 1%. The debt with the highest after-tax interest rate is typically the best one to pay off first.
The amounts you owe. If you owe significantly less on your student loans than your mortgage, eliminating the smaller debt first might feel great. Then you’d only have one debt left to pay off instead of two.
You have an interest-only adjustable-rate mortgage (ARM). With this type of mortgage, you’re only required to pay interest for a period (such as several months or up to several years). Then your monthly payments increase significantly based on market conditions. Even if your ARM interest rate is lower than your student loans, it could go up in the future. You may want to pay it down enough to refinance to a fixed-rate mortgage.
You have a loan cosigner. If you have a family member who cosigned your student loans or a spouse who cosigned your mortgage, they may influence which loan you tackle first. For instance, if eliminating a student loan cosigned by your parents would help improve their credit or overall financial situation, you might prioritize that debt.
You qualify for student loan forgiveness. If you have a federal loan that can be forgiven after a certain period (such as 10 or 20 years), prepaying it means you’ll have less forgiven. Paying more toward your mortgage would save you more.
Being completely debt-free is a terrific goal, but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the end.
As you can see, the decision to eliminate debt and in what order, isn’t clear-cut. Mortgages and student loans are some of the best types of debt to have—they allow you to build wealth by accumulating equity in a home, getting higher-paying jobs, and freeing up income you can save and invest.
In other words, if Maya’s brother uses his excess cash to prepay a low-rate mortgage or a student loan, it may do more harm than good. So, before you rush to prepay these types of debts, make sure there isn’t a better use for your money.
Being completely debt-free is a terrific goal, but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the end. Only you can decide whether paying off a mortgage or student loan is the right financial move for you.
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Granite State Credit Union (GSCU) provides members with a variety of mortgage products across the state of New Hampshire. GSCU AT A GLANCE Year Founded 1945 Coverage Area New Hampshire HQ Address 1415 Elm Street, Manchester, New Hampshire 03101 Phone Number 1-800-645-4728 GSCU COMPANY INFORMATION Services the state of New Hampshire Offers conventional loans, […]
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