Should You Pay Discount Points When You Get Your Mortgage?

Posted in Mortgage by Michigan Real Estate Expert on April 25th, 2018

Should You Pay Discount Points When You Get Your MortgageOne of the challenges you will face when deciding how much money to put down on your new home is whether to put down a larger down payment or to take a bit of money from your down payment and use it to buy “discount points” to lower your interest rate.

There are pros and cons to doing both and each borrowers situation will be different so it’s important to understand which option is best for your individual situation. Some factors you should consider include:

  • Cost of borrowing – generally speaking, to lower your interest rate will mean you pay a premium. Most lenders will charge as much as one percent (one point) on the face amount of your loan to decrease your rate. Before you agree to pay points, you need to calculate the amount of money you are going to save monthly and then determine how many months it will take to recover your investment. Remember, closing points are tax deductible so it may be important to talk to your tax planner for guidance
  • Larger down payment means more equity – keep in mind, the larger your down payment, the less money you have to borrow and the more equity you have in your new home. This is important for borrowers in a number of ways including lower monthly payments, better loan terms and potentially not having to purchase mortgage insurance depending on how much equity you will have at the time of closing
  • Qualifying for a loan – borrowers who are facing challenges qualifying for a loan should weigh which option (points or larger down payment) is likely to help them qualify. In some instances, using a combination of down payment and lower rates will make the difference. Your mortgage professional can help you determine which is most beneficial to you

There is no answer that is right for every borrower. All of the factors that impact your mortgage loan and your overall financial situation must be considered when you are preparing for your mortgage loan.

Talking with your real estate professional and where appropriate your tax professional will help you make the decision that is right for your specific situation.

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Best Tax Deductible Home Improvements for Homeowners

Posted in Real Estate by Michigan Real Estate Expert on April 17th, 2018

Best Tax Deductible Home Improvements For HomeownersBefore delving into tax-deductible home improvements, it’s important to understand that these tax deductions won’t be applied immediately. In most cases, homeowners can only benefit, tax-wise, from their home renovations later, when they sell their home.

It’s important for homeowners to keep receipts for their improvements, though so they have proof of the improvements they made, even if it’s years later when they sell their residence.

Typical Renovations/ Home Improvements That Can Yield Eventual Tax Benefits

A home improvement is any project that substantially adds value to a home. It can include adapting it to be more useful or be improvements that allow it to be used differently. The following are some general home improvements that can yield tax savings when a home is sold for a profit.

  • Room additions.
  • Upgrades to plumbing.
  • Kitchen improvements.
  • A new roof.
  • New bathrooms.
  • Upgraded landscaping.
  • Improvements to fencing.
  • New decks.
  • Improved wiring.
  • New walkways.
  • Driveway improvements.
  • Plumbing upgrades.

How Delayed Tax Benefits Work

While a homeowner can’t take the amount of money they spent on one of the above home improvements and deduct it that same tax year, they can sometimes benefit from the investment in their home. This is true because a homeowner can effectively reduce the amount of taxes they have to pay if they sell their home for a profit down the road.

When an improvement is made, the cost of those improvements are added to the tax basis of a home. The basis is the investment in a home for tax purposes. The greater this number becomes, the less the profit is from selling a home.

The following explains it a little better:

Example Of Tax Basis And Home Improvement Tax Savings

A fictional homeowner purchases their home for $600,000 and sells their home 20 years later for $1,000,000. Their original “profit” from the sale would have been $400,000, which would have been taxable income at the time of the sale. However, throughout the 15 years when they resided in the home, this homeowner made around $60,000 worth of home improvements, including a roof improvement and a kitchen update. The $60,000 is then added to the original investment this homeowner made in their home, bringing their tax basis to $660,000.

The homeowner’s profit when they sell their home is then reduced from $400,000 to $340,000. Many homeowners use home improvements as a way to reduce the amount of taxes they will one day have to pay when they sell their home for a substantial profit.

Other Ways For Homeowners To Benefit From Their Home This Tax Season

Homeowners can make their home work for them each and every tax year by qualifying for the home office deduction. This only works if they own and operate a legitimate business out of their home, though. A part of the home must be used either regularly or exclusively for the business to qualify.

The above is some pertinent information on how homeowners can use home improvements to reduce their tax burden.   As always, check with your trusted tax professional for accurate advice on your personal situation.

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How The 2018 Tax Changes Can Affect Your Mortgage

Posted in Mortgage by Michigan Real Estate Expert on April 12th, 2018

How The 2018 Tax Changes Can Affect Your MortgageWhen the chatter was at its peak on the 2018 tax law changes being proposed, one of the big areas of concern for homeowners was the elimination of the mortgage interest deduction. Right behind that issue was a similar treatment with regards to property tax deductions.

As the rumors swirled and Congress moved, many feared both deductions had finally met their day and were going to be entirely eliminated, resulting in a major financial hit that many homeowners and particularly those in high real estate cost states would have felt painfully. As it turned out, there’s no reason to panic or suddenly dump titled real estate just because it has been bought with a mortgage. 

Yes, both issues were impacted by the 2018 tax law changes, but neither the mortgage interest deduction nor the property tax deduction were eliminated entirely. Instead, they were modified.

The changes include:

  • Mortgage interest deduction – the new laws cap the eligible debt to $750,000. While old loans originated prior to the law change date are still eligible up to $1 million, new mortgages created after the enactment date are caught in the lower universe. However, being realistic, most homebuyers are not in the bracket that afford a $750,000 plus priced home except maybe in a few communities such as New York City or the San Francisco/Bay Area in California. So the change basically means business as usual for 9 out of 10 homeowners in the U.S.
  • Real estate property taxes – total state and local taxes eligible for deduction are now capped at $10,000. This is where some homeowners could feel a pinch as a typical home in higher cost states easily generates property tax levels of $5,000 to $7,000 for a $300,000 home. So those units assessed a higher value by tax auditors will likely feel this new limitation take effect.
  • The standard deduction increase – remember, the above items are only useful to the extent that a tax filer itemizes his deductions. With a standard deduction now at $12,000 for an individual and $24,000 for a married couple, filing jointly, the option to itemize could go away entirely if the standard deduction provides a higher level of tax savings overall. And then that makes the above two deductions entirely moot and useless. Of course, it’s not entirely a plus since the personal exemption is also eliminated, thus reducing the benefit of the higher standard deduction by as much as $4,150 per person. In essence, the change is a wash, but could be enough to bar use of itemization, which would hurt greatly.

So the changes did not wipe out any benefit entirely (except the personal exemption). Instead, the real impact depends on which change applies to a specific taxfiler’s situation.

This is why two homeowners in the same town with the same house and market value could end up having very different tax results with the 2018 changes. Because there is so much variance.

As always, work with a trusted tax professional in order to understand how these changes will affect your personal tax situation.

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