Springtime means tax season and usually an upsurge in home buying as well. With that in mind, here's some timely information about easily overlooked tax breaks, along with tips on common mistakes to avoid before applying for a home loan.
Are you up to date on tax rules that affect your 2015 return? Here's a summary of tax savings opportunities that homeowners sometimes overlook.
1. Deduct Mortgage Interest On a Second Home
Mortgage interest paid on a second home can be fully deductible, according to the IRS. What's really interesting is the definition of a "qualified home".
According to the IRS, a qualified first or second home is "a house, condominium, cooperative, mobile home, house trailer, boat,or similar property that has sleeping, cooking, and toilet facilities." This definition covers a much wider range of living options than many people realize.
If a second home is rented out, you'll need to occupy it for at least 14 days or 10 percent of the days it was rented, whichever is longer, in order for it to qualify as a second home, according to IRS Publication 936.
2. Mortgage Insurance Premiums Are Still Deductible
This tax break was renewed for 2015 and 2016, meaning that homeowners who pay for mortgage insurance (PMI or MIP) can continue to deduct the cost as long as they itemize deductions. It phases out as adjusted gross income reaches certain levels ($100,000 to $109,000 for couples, $50,000 to $54,500 for those filing separately).
3. Deduct Points Paid On a Home Loan
You can deduct points that either you
or the seller paid during the course of obtaining your home loan. If it was due to a purchase, you can usually deduct all of the points during that same year. If points were paid because of a refinance you'll typically write them off over the lifetime of the loan, but can usually write them off in full when you pay off the loan or sell the property.
4. Remember to Deduct Any Mortgage Interest Paid at Closing
If you purchased a home in 2015 and you itemize deductions, be sure to include any mortgage interest and property taxes paid in your closing costs. At the end of the year the lender will send you a tally of mortgage interest you paid via monthly payments, but this typically does not include the interest you paid in advance at the time of purchase. (You'll find that figure on the settlement statement you received at closing.)
5. 2016 Is the Last Year to Get Many Renewable Energy Tax Credits
Homeowners can claim tax credits for investments that add renewable energy technology to their home, including solar panels, geo-thermal systems, and wind energy improvements. Credits for all technologies are set to expire at the end of 2016, so this year is the time to move forward if any of them are on your to-do list.
The bottom line: Nothing beats an expert opinion when you're dealing with issues that could save (or cost) you many thousands of dollars. The notes above are not expert financial or legal advice, but are meant to keep you informed of issues that you can investigate further with a qualified tax professional if you wish.
Avoiding Common Borrower Mistakes
The behavior that lenders look for in a good borrower is sometimes not what you'd expect. Here's some advice that mortgage consultants often find themselves giving to well-intentioned clients who had plans to do exactly the opposite:
1. "Don't cancel old credit cards."
People often cancel old lines of credit in an effort to tidy up their credit portfolio prior to applying for a loan, but this can actually do more harm than good. Lines of credit that have been around for a long time tend to strengthen your credit score, which means that even if you haven't used a credit card in years it's probably a good idea to keep the account active.
2. "Don't divest yourself of cash in order to pay off debt."
(Or, at least think twice before you do.) Problems pop up when buyers assume that the best way to qualify for a home loan is to eliminate as much debt as possible prior to applying. In reality, lenders also need to see that a buyer has sufficient cash reserves.
This means that buyers who want to pay off a $5,000 credit card balance in order to eliminate a payment of $120 per month should first make sure that they will have enough cash left over to satisfy the lender.
There's a chance they could be denied because of low cash reserves after paying off the card, whereas their debt-to-income ratio might have let them easily qualify for the home loan even with the monthly credit card payment in place.
3. "Use credit cards occasionally (yes, even if you don't need to)."
Lenders want to see that you use credit responsibly. Ironically, this
doesn't mean not using credit unnecessarily. The result is that mortgage consultants sometimes find themselves explaining to high-net-worth, zero-debt individuals why buying at least one cheeseburger per month using their credit card for a few months will make it easier for them to qualify for a home loan.
www.AnnualCreditReport.com is the place to get your free credit report once a year. Other websites look similar but offer free reports only if you sign up for ongoing monthly paid services such as credit monitoring.
www.myFICO.com is the place to get your real FICO credit score (the score most used by lenders). There is a charge to obtain the score.
Did you know? Other websites, including Experian, TransUnion, and Equifax, will offer to sell you a credit score but what you actually receive is an "educational" score, which is often much different from your true FICO score.
Note: FICO scores range from 300 to 850. In general, above 700 is considered good and above 740 can enable borrowers to obtain some of the most optimal interest rates.
Contact Us for Market Information Are you curious about your home's current market value, or do you have a question about home buying? Just reply to this email, or call us at 952-442-1300.
View Our Featured Home Listings
Links that Make Life Easier
Sometimes real estate-related, sometimes not... these are assorted links that come in handy:
Cell Phone Plan Termination Fee Calculator If you've had it with your cell phone plan but still have time left on your contract, the RateMyPlan website can help you determine how much early termination will cost.
Are you thinking of buying or selling a home in the next year, or could you use some remodeling advice? Even if you just need the name of a good service provider, please remember that we're always here to help you. We welcome the opportunity to serve you, your friends and associates with our expertise and recommendations.
Please give us a call today at (952) 442-1300 if we can be of assistance!