Tax Advantages of Your Mortgage
Save Money with Your Home Mortgage
For most people, deducting your home mortgage interest payments from your taxable income is your first reward of home ownership! Of course this depends entirely on your income and other financial issues, so before you leap into any financial program, speak to your personal accountant.
There are several ways to save money with your mortgage:
EASY Tax Savings:Pay AHEAD on your mortgage at year’s end by one payment (or more). Most mortgages allow you to pay an additional 20% each year without penalty. By making an extra payment this year, you may be able to deduct the interest from your tax bill. Your accountant can advise if you will qualify for this additional deduction. Your bank must receive your payment by December 31 of the year you are making the extra payment.
Your bank will provide your Federal Form 1098 before January 31 of the year you are filing your taxes (for the previous year). And all of the interest you paid in the previous year will be reported to the Internal Revenue Service.
Refinancing Your Cards We have become somewhat blase about refinancing our mortgages. This practice is not only useful for achieving cash out but by rolling your credit card debts into your mortgage--you now have the benefit of being able to deduct what you would have paid in credit card interest. Credit card interest rates are generally higher than mortgage rates...so you save on both counts!
ELIMINATE Mortgage Insurance!
If you have a loan amount over 80% Loan to Value, You may notice that annoying Mortgage Insurance fee on your monthly statement. Consider if one of these options applies to you:
If you finance your home with little or no down payment (many first time homeowners do) then your 1st mortgage amout will be above 80% Loan to Value (LTV). Conventional loans require Mortgage Insurance to protect the lender from risk of default. To make this go away you must have a solid record of payment with no ‘lates’ for two years and good credit maintained. If during that time, your home has increased in value, you can ask your bank or lender to release you from the Mortgage Insurance requirement. This is accomplished with a review and will focus on the valuation of your home, effectively recognizing your good behavior and your current LTV under 80%.
If, on the other hand, you need to refinance or purchase a home requiring more than 80% financing, ask your lender if they can offer an 80/20 or Combination or Combo Loan. This means your first mortgage is amount is 80% or less, with a 2nd mortgage at 20%. This means you will pay slightly higher for the 2nd mortgage, but it eliminates the need for MI or Mortgage Insurance. A higher interest rate second mortgage is still often a better product than a credit card and the interest is generally tax deductible.
Next, if you prefer to finance over 80% in one loan, you may qualify for a Tax Advantage Mortgage Insurance Loan or TAMI. This kind of loan has a slightly higher interest rate to cover the lender’s risk. Since you are not billed Mortgage Insurance separately (be sure to check the terms before closing) you can usually deduct the full interest. The higher interest rate is designed to more than compensate for your tax deduction. Our comments are offered as general terms so be sure to consult with your tax accountant on what best suits your situation.
UPDATE on MI: December 2006: Our Congress has just voted into tax code the ability for homeowners to deduct your Mortgage Insurance from your income taxes. Even more reason to consider going with MI rather than a higher loan amount to cover "lender paid MI". The reason? Mortgage Insurance can be reviewed and eliminated with your lender's cooperation usually within 2-5 years depending on how long it takes for your equity position to reach at least 20%. If you had negotiated a higher interest rate for the lender paid version, you are stuck with it! Of course there is no guarantee this will continue indefinately since tax laws change with the winds. Naturally, you must have a stellar record of paying your mortgage on time to negotiate dropping MI with your lender.
Some loan programs do not allow you to drop or negotiate MI so be sure and know what loan program you have. Your lender can advise.
Happy savings!
Copyright 2006 Susan Templeton
For most people, deducting your home mortgage interest payments from your taxable income is your first reward of home ownership! Of course this depends entirely on your income and other financial issues, so before you leap into any financial program, speak to your personal accountant.
There are several ways to save money with your mortgage:
EASY Tax Savings:Pay AHEAD on your mortgage at year’s end by one payment (or more). Most mortgages allow you to pay an additional 20% each year without penalty. By making an extra payment this year, you may be able to deduct the interest from your tax bill. Your accountant can advise if you will qualify for this additional deduction. Your bank must receive your payment by December 31 of the year you are making the extra payment.
Your bank will provide your Federal Form 1098 before January 31 of the year you are filing your taxes (for the previous year). And all of the interest you paid in the previous year will be reported to the Internal Revenue Service.
Refinancing Your Cards We have become somewhat blase about refinancing our mortgages. This practice is not only useful for achieving cash out but by rolling your credit card debts into your mortgage--you now have the benefit of being able to deduct what you would have paid in credit card interest. Credit card interest rates are generally higher than mortgage rates...so you save on both counts!
ELIMINATE Mortgage Insurance!
If you have a loan amount over 80% Loan to Value, You may notice that annoying Mortgage Insurance fee on your monthly statement. Consider if one of these options applies to you:
If you finance your home with little or no down payment (many first time homeowners do) then your 1st mortgage amout will be above 80% Loan to Value (LTV). Conventional loans require Mortgage Insurance to protect the lender from risk of default. To make this go away you must have a solid record of payment with no ‘lates’ for two years and good credit maintained. If during that time, your home has increased in value, you can ask your bank or lender to release you from the Mortgage Insurance requirement. This is accomplished with a review and will focus on the valuation of your home, effectively recognizing your good behavior and your current LTV under 80%.
If, on the other hand, you need to refinance or purchase a home requiring more than 80% financing, ask your lender if they can offer an 80/20 or Combination or Combo Loan. This means your first mortgage is amount is 80% or less, with a 2nd mortgage at 20%. This means you will pay slightly higher for the 2nd mortgage, but it eliminates the need for MI or Mortgage Insurance. A higher interest rate second mortgage is still often a better product than a credit card and the interest is generally tax deductible.
Next, if you prefer to finance over 80% in one loan, you may qualify for a Tax Advantage Mortgage Insurance Loan or TAMI. This kind of loan has a slightly higher interest rate to cover the lender’s risk. Since you are not billed Mortgage Insurance separately (be sure to check the terms before closing) you can usually deduct the full interest. The higher interest rate is designed to more than compensate for your tax deduction. Our comments are offered as general terms so be sure to consult with your tax accountant on what best suits your situation.
UPDATE on MI: December 2006: Our Congress has just voted into tax code the ability for homeowners to deduct your Mortgage Insurance from your income taxes. Even more reason to consider going with MI rather than a higher loan amount to cover "lender paid MI". The reason? Mortgage Insurance can be reviewed and eliminated with your lender's cooperation usually within 2-5 years depending on how long it takes for your equity position to reach at least 20%. If you had negotiated a higher interest rate for the lender paid version, you are stuck with it! Of course there is no guarantee this will continue indefinately since tax laws change with the winds. Naturally, you must have a stellar record of paying your mortgage on time to negotiate dropping MI with your lender.
Some loan programs do not allow you to drop or negotiate MI so be sure and know what loan program you have. Your lender can advise.
Happy savings!
Copyright 2006 Susan Templeton