New tax legislation was signed into law at the end of 2017, and it included some significant changes for homeowners. These changes took effect in 2018 and do not influence your 2017 taxes. Here’s a brief overview of this year’s tax changes and how they may affect you.
The amount of mortgage interest you can deduct has decreased.
Under the old law taxpayers could deduct the interest they paid on a mortgage of up to $1 million. The new law reduces the mortgage interest deduction from $1 million to $750,000.
These changes do not affect mortgages taken out before December 15, 2017.
The home equity loan deduction has been eliminated.
The prior law allowed homeowners to deduct the interest on a home equity loan if the value of the loan was $100,000 or less. The new law eliminates the deduction for interest on home equity loans.
The property tax deduction is capped at $10,000.
Previously taxpayers could deduct all the state, local and foreign real estate taxes they paid with no cap on the amount. The new law limits the deduction for all state and local taxes – including income, sales, real estate, and personal property taxes – to $10,000.
The casualty loss deduction has been repealed.
Previously, homeowners could deduct unreimbursed casualty, disaster and theft losses on their property. That deduction has been repealed, with an exception for losses on property located in a federally declared disaster area – an important victory!
The capital gains exclusion remains unchanged.
Homeowners can continue to exclude up to $500,000 for joint filers or $250,000 for single filers for capital gains when selling their primary residence as long as they have lived in the home for two of the past five years. An earlier proposal would have increased that requirement to five out of the last eight years and phase out the exclusion for high-income households, but it was struck down.
When it comes to mortgages, there’s a big gap between what people think they need in order to get one and the reality of what buyers are successfully doing—especially young people.
I know, I know, I’ve written on down payments before (like last month, when I highlighted that putting 20% down isn’t the norm).
But you know what? When it comes to what might be the biggest purchase of your life—one that can be incredibly intimidating for first-time buyers—it’s nice to know real facts. And in the mortgage market, reality is very often different from perception. Or, for that matter, myth.
So on average, those non-owners thought a down payment would need to be about 16%. The reality? The average down payment on purchase mortgages in 2016 was 11%.
In fact, when we drill into the purchase mortgages taken out by people under 35, who represent the majority of first-time buyers, we see the average down payment was even lower, at just under 8%. In other words, aspiring first-time buyers think it takes twice as much to buy a home than it really does.
Perception, meet reality
But averages can be misleading, right? Especially when there is a wide distribution, like we observe with down payments. When we dig into what actually happened in 2016 we find that most young people buy homes with … less than 5% down. That’s less than one-third of what the average non-owner had assumed!
As with many things in life, the most correct answer to the question of how much you need to put down is “it depends.” There are a slew of important factors like who you are, your financial circumstances, the home’s location, and the price of the home.
It is possible to buy a home with a mortgage with no money down. VA and USDA loans are the most popular loans that offer the ability to put no money down. In 2016, 16% of buyers under 35 put no money down.
The largest share (36%) of loans for buyers under 35 in 2016 was for people putting down something less than 5%. The options there include loans offered through the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture, but also 3% down payment programs backed by Fannie Mae and Freddie Mac (aka conforming loans). And, of course, this includes the traditional 3.5% FHA mortgage that is primarily targeted to first-time buyers.
More than half of young people who successfully bought a home with a mortgage in 2016 put at most 5% down. The average dollar amount for these buyers was $3,500. That’s right, if you have #FOMO from your friends buying homes, the majority of them are putting down just a few thousand dollars.
How are they doing it? The aforementioned mortgage products (conforming, FHA, VA, and USDA) represent almost 99% of the mortgages to people under 35 in 2016. There is nothing exotic about this.
And it doesn’t require perfect credit, just fair credit. The average FICO was 713, and the floor we observed in FICOs (below which very few mortgages were made) was 639.
Put that all together and you can see that for the millennial dreaming of buying a home this year, you need a FICO score of at least 639 and enough money that you could put down at most 5%. If you live in a typical American town, what you need could be as little as $3,500.
That sounds a lot more attainable than most people think. The truth is out there! Take advantage of it.
Now may be the right time to get top dollar for your home
According to Fannie Mae’s Home Purchase Sentiment Index (HPSI), more homeowners are beginning to realize that they may have more equity than they first thought. 78.8% of homeowners have significant equity (more than 20%) in their homes today!
Many homeowners with a mortgage have an opportunity to take advantage of today’s seller’s market.
Let’s get together to evaluate your situation and answer any questions you may have.
Posted on February 2, 2018 at 9:35 pm
You know you should buy a home. Eventually. But timing matters when it comes to such an enormous and potentially life-changing purchase. Which begs the question: When is the best time to buy a house? Does such a moment exist when all lights turn green, guaranteeing this is a decision you won’t regret?
While there’s no crystal ball in real estate, there are some fairly easy-to-read signs that a home purchase is something you should consider. Let’s dive into some of the factors that can influence whether the time is right for you to pull the trigger.
For many people, knowing when to buy a home all comes down to the numbers. Here are the biggest pieces of that equation.
You have a down payment: If you need a mortgage to buy a home, you should know that most lenders will want you to show them the money—that is, have a sizable down payment. For most conventional loans, you’ll need to scrape together 20% of a home’s price, or $60,000 on a $300,000 home. Amassing that cash can be challenging, but know that some lenders can require as little as 5% down. You also may want to check into down payment assistance programs; many homeowners are surprised to find that they qualify.
You can afford a monthly mortgage: How much you can afford in monthly mortgage hinges on your income and debts. Higher income is good, of course; higher debt is bad. Check out a mortgage calculator for an easy way to plug in your salary and debts to see how much home you can afford in your area.
You have a good credit score: Your credit score is a measure of how well you’ve paid off past debts. Lenders look at this number to prognosticate how well you’ll pay them back, too. If you have no credit history, you should get some fast (lenders will want to see at least a year of payments under your belt). If your credit score is poor, you may want to do what you can to bring it up to snuff, because a higher credit score means you’ll stand to land a better loan.
Housing markets go through highs, lows, and bubbles—much like stocks. As such, you may be wondering whether current market conditions are conducive to buying (e.g., “Wow, you can buy a whole townhouse for under two hundred grand?”) or a total rip-off (e.g., “a two-bedroom for a half-million, seriously?!”).
Sadly, the adage for stocks applies to housing, too: It’s impossible to perfectly time the market. Yet there is still something to be said for considering economic conditions.
“You should never buy a home you can’t afford, but sometimes market conditions offer a little incentive to get off the sidelines,” says Mark Abdel, a real estate professional with Re/Max Advantage Plus in Minneapolis–St. Paul.
You’ll want to consider the following:
Inventory: Look through listings for your area. If the majority of houses have been sitting on the market for more than six months, then the market is slow and prices should be OK. But if many properties get snapped up in months, or even weeks, this suggests you’re in a seller’s market—and that’s where buyer bidding wars could drive up prices. Of course, they could just continue to climb, or they may have peaked and go down. Local real estate agents can give you the lay of the land and their predictions, but just remember it’s anyone’s guess what could happen next.
Interest rates: Interest rates on home loans also fluctuate depending on market conditions. Currently interest rates are fairly low but have been inching up fast, which has many thinking of buying a home before they rise even higher. Make sure to check out interest rates in your area.
Renting vs. buying: A final factor to consider is whether it’s cheaper to own or rent, based on the market conditions in your area. You can figure that out with our rent vs. buy calculator.
Does time of year matter?
Conventional wisdom says to buy during the peak seasons of spring and summer, when there may be more options. But that also translates into more competition and potentially higher prices. That’s why you shouldn’t neglect fall and winter for home shopping, especially if the other conditions above line up.
“Buying off-season usually gives buyers more negotiating power for both the price and the closing date,” Abdel says, because off-season sellers are often more motivated to sell and therefore may be more willing to make a deal.
How long should you stay put?
Last but not least, one final factor to consider regarding when to buy a house is whether you plan to stick around. Buying a home carries a bunch of upfront costs, so it’s generally best you don’t sell soon after you’ve closed the deal. Typically home buyers should expect to stay in their house at least five years to make this investment worthwhile.
The joys of home-ownership are many: Your own house is a place to make sweet memories, build a financial nest egg, and whittle down your tax bill. Wait, what? Yep, it’s true: Your home can save you a bundle on April 15.
We’ve rounded up every last way to take advantage of the tax benefits of owning a home. Read on for the full rundown just to make sure you aren’t missing any, then pat yourself on the back for all the moolah you’ll save!
Tax write-off No. 1: Your mortgage interest
This is the biggie tax benefit of owning a home: the ability to deduct the mortgage interest you pay over the course of a year. And the more recent your mortgage, the greater your tax savings.
“The way mortgage payments are amortized, the first payments are almost all interest—so that’s why the mortgage interest deduction is worth the most in the first few years of the loan,” says Wendy Connick, owner of Connick Financial Solutions. (See how your loan amortizes and how much you’re paying in interest with this mortgage calculator.)
Here’s how this deduction looks for a married couple in the 28% tax bracket (that means a joint annual income between $151,201 and $230,450) who bought a home with a $300,000, 30-year mortgage at a 4% interest rate. They will pay $11,904 in mortgage interest their first year. Once you add in the other itemized federal deductions below, these homeowners can expect to save at least $3,333 in taxes during their initial year of ownership.
Tax write-off No. 2: Your property taxes
Generally, your property taxes are deductible on your tax return, says Brian Ashcraft, director of compliance at Liberty Tax Service. And that could be a hefty savings. According to the U.S. Census Bureau, the average household property tax is $2,127. If you have a mortgage, your taxes are built into your monthly payment.
You can also pay property taxes early and write off the entire expense if you’re staring down a large tax bill for any given year. Just note that you must claim the deduction in the year you wrote the check. For example, if you paid your 2017 property tax in 2016, claim that tax benefit on your 2016 return. Here’s more info on how to calculate property taxes.
Tax write-off No. 3: Private mortgage insurance
If you put less than 20% down on your home, odds are you’re paying private mortgage insurance, or PMI, which costs from 0.3% to 1.15% of your home loan. But Uncle Sam’s willing to give you a tax break here by allowing you to deduct this amount from your income, too.
How much you’ll save: If you make $100,000 and put down 5% on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and thus cut taxable income by $1,500.
Note: The deduction is due to expire this year, says Connick. “Unless Congress renews it, the deduction will not be available for the 2017 tax year.”
Tax write-off No. 4: Energy-efficiency upgrades
Don’t miss out on tax credits for any “green” updates you’ve done to your home in the past year, says Michael Banks, founder of FortunateInvestor.com. The Renewable Energy Efficiency Property Credit allows you to claim a credit for up to 30% of the cost of equipment you purchased that uses renewable energy sources (e.g., solar panels and wind turbines).
Other home upgrades like new HVAC systems, energy-efficient windows, and storm doors can also earn a tax credit of up to $500. For example, if you installed central air conditioning, you can claim a $300 credit. This credit for residential energy-efficiency improvements expired at the end of 2016, so hopefully you made these improvements last year. If not, there’s still time for solar panels, since this credit runs through 2019.
Tax write-off No. 5: A home office
If you work from home, your office space and expenses can be deducted from your income, too. According to Vincenzo Villamena, managing partner of Online Taxman, you can take a $5-per-square-foot deduction for up to 300 square feet of office space, which amounts to a maximum deduction of $1,500. Understand, however, that there are strict rules on what constitutes a dedicated, fully deductible home office space. Your accountant can lead you through it.
Tax write-off No. 6: Home improvements to age in place
Many older homeowners plan to stay put and age in place—and if that entails renovations such as wheelchair ramps or grab bars in slippery bathrooms, the cost of these improvements for you, a spouse, or dependent results in a nice tax break, says Jayson Mullin, owner of Top Tax Defenders.
“You can deduct the amount by which the cost of the improvements exceeds the increase in your home’s value,” says Mullin. To break that down, let’s say the cost of installing a ramp totals $10,000 and increases your home’s value by $7,000. Then the allowable deduction would equal $3,000.
Just remember, these “aging in place” deductions must cost more than 10% of your adjusted gross income. So if your AGI is $60,000, there’s no deduction for the first $6,000 of medical home improvement expenses. But if you’re 65 and older, the expense must exceed only 7.5% of your AGI.
Tax write-off No. 7: Interest on a home equity line of credit
If you’ve tapped into your home equity by taking out a home equity line of credit, or HELOC, the interest you pay on the loan is also deductible provided you use this money to pay for home improvements or repairs.
How much you’ll save depends on the amount borrowed, but let’s crunch some sample numbers: If you take out a four-year $20,000 HELOC at 4%, you’ll have an $800 deductible that will save you about $205 in the first year of your loan. Use this calculator to see how much you’ll save.
Posted on March 1, 2017 at 1:19 am
No matter how much time you spend on researching and educating yourself about your home purchase, it’s hard to cover every detail. Here are a few tips for avoiding rookie mistakes with your first home purchase.
Save as early as you can: Even if you think you’re years away from buying your first home, try to start saving for your down payment. It makes a huge difference in your monthly payments, and helps avoid paying Private Mortgage Insurance.
Be thorough with mortgage shopping: There are countless resources out there that can help you get the best terms for your mortgage. It may seem like a lot of work to shave less than a point off your mortgage rate, but it’ll save you thousands in the long run.
Consult a skeptic: You’re likely to fall in love with a home, and that can make it difficult to take problems seriously. Bring along a skeptical friend or family member who can give you an honest opinion.
Be patient with getting settled: You’ll be anxious to make your new home your own, but take some time to see how your budget truly shakes out. In other words, hold off on big furniture purchases and remodeling projects.
Make sure you’re happy with the neighborhood: The house may be perfect, but don’t discount the surroundings. You don’t want to end up in the suburbs if you’re going to miss walking to your favorite coffee shop, and you don’t want to settle for the city if you’re looking forward to some peace and quiet.