6 Tax Breaks Every Homeowner Should Know

Regardless of the current state of our economy and thehousing market, buying a home is still a great investment. However, the resulting taxes that accompany owning a home can lead to confusion and uncertainty.

In most cases, you need to itemize your taxes in order to take advantage of all the tax breaks that accompany home ownership. This might seem overwhelming, but the benefits of completing this process make up for the inconvenience.

1. Mortgage Interest Deduction

Mortgage Interest Deduction (MID) is a top tax break forhomeowners,which can save you a significant amount of money. In the beginning, the majority of your monthly mortgage payments go toward loan interest, and you can deduct all the interest from your mortgage on your taxes. Keep Form 1098, issued by yourlender, with your important records. This form explains exactly how much you can deduct and serves as proof if you are audited by the IRS.

2. Mortgage Insurance Premiums

Homeowners with new mortgages with a loan-to-value ratiohigher than 80% must carry some form of private mortgage insurance (PMI). This insurance protects the lender against loan default. Typically, once you reach 20% equity in your home, you can avoid paying private mortgage insurance.

Until you reach that level of equity, if your adjusted gross income (AGI) is less than $100,000 (or $50,000, if married filing separately), you may be able to deduct the amount that you paid. If you surpass that income level, the deduction is either reduced or eliminated. If your AGI is $109,000 ($54,500, if married filing separately) then the deduction goes away altogether.

3. Energy Star

Installing energy-efficient windows, doors, and skylights can result in another tax deduction. In order to take advantage of this tax break, you must install the items by the end of the year. Additionally, they must be installed at your primary residence, and they need to meet Energy Star programrequirements.

If you meet the necessary criteria, you can receive a tax credit equal to 10% of the cost of the products. The credit for windows and skylights is capped at $200, the limit for doors is $500, and you cannot deduct installation costs. The IRS does not state what documentation you need to prove that you paid for these costs. However, you should hold on to all receipts and Energy Star labels for any qualified improvements you make on your home. There are quite a few green energy tax deductions for home improvement.

4. Points

Points refer to charges or fees paid by a borrower to obtain ahome mortgage. If you have your first mortgage, you can deduct these charges in the year that you paid them if the loan is for your primary residence and you didn’t pay excessive points. If you have refinanced your mortgage, you can deduct points over the life of the loan. Check the IRS rules for details.

5. Property Taxes

As long as they are based on the assessed value of the real property, you can deduct state and local property taxes. If you pay your property taxes out-of-pocket, you need to locate your bills to determine how much you paid. Most homeowners pay through an escrow account; if you do the same, the information also appears on Form 1098.

6. Construction Loan Interest

If you take out a construction loan to build a home, you may qualify to deduct the interest. You can only use this deduction for the first 24 months of the loan, even if the actual construction takes longer.

Final Thoughts

If you stay organized and focused and keep excellent records, you can take advantage of every tax break, deduction, and credit at your disposal. However, you should seriously consider consulting a tax professional when preparing your taxes for the first time after you buy your home.

You will likely encounter various technical restrictions and confusing guidelines, and you certainly don’t want any problems with the IRS. A professional can help you find more tax breaks, and you will get the best return on investment when you understand and take advantage of each and every one. Which tax breaks are you taking advantage of as a homeowners?

Mortgage Rates Reach New Record Lows

Mortgage rates were back to hitting record lows again, pushing housing affordability even higher to home buyers, Freddie Mac reports in its weekly mortgage market survey. For the sixth consecutive week, the 30-year fixed-rate mortgage, the most popular choice among buyers, has averaged below 4 percent — unheard of until a few weeks ago. 

"Mortgage rates eased slightly this week to all-time record lows following mixed indicators in the labor market,” Frank Nothaft, chief economist at Freddie Mac, said in a statement. The economy added 1.6 million jobs in 2011 — the highest number since 2006 — but overall unemployment still remains high, Nothaft noted. 

Here’s a closer look at rates and the new record lows they posted for the week ending Jan. 12:

• 30-year fixed-rate mortgages: averaged 3.89 percent, with an average 0.7 point, reaching a new all-time low. Previously, 30-year mortgages’ record low was last week’s 3.91 percent average. A year ago at this time, 30-year rates averaged 4.71 percent. 
• 15-year fixed-rate mortgages: averaged 3.16 percent, with an average 0.8 point, dropping from last week’s 3.23 percent average. Last year at this time, 15-year rates averaged 4.08 percent. 
• 5-year adjustable-rate mortgages: averaged 2.82 percent, with an average 0.7 point, dropping from last week’s 2.86 percent average. Last year at this time, 5-year ARMs averaged 3.72 percent.
• 1-year ARMs: averaged 2.76 percent, with an average 0.6 point, this week, falling from last week’s 2.80 percent average. A year ago, 1-year ARMs averaged 3.23 percent. 

Successful Homeowners Since 2009

Good news: those who bought homes in 2009 and later have become one of the most successful groups of homeowners. Mortgage default rates have been exceptionally low.

Bad news: the loan approval process has become so strict since 2009 that only super-high credit score individuals are able to obtain mortgages. A good chunk of middle-class borrowers have therefore been shut out of the market.

Is there any hard factual evidence to show that lending standards are just way too tight? Well, the Federal Reserve’s white paper, released last week, explicitly emphasized the need to ‘remove some of the obstacles preventing creditworthy borrowers from accessing mortgage credit’ in order to upgrade the economic growth prospects.

As for the data, consider the following loan performance by the vintage year after one year from the time of origination on Fannie and Freddie backed mortgages. Loan default rates were 0.3 to 0.4 percent in the more normal housing years of 2002 and 2003, well before the developments of a bubble. The default rates then rose to 2 and 3 percent in the immediate years of the bubble crash in 2007 and 2008. For those who took out loans in 2009 and 2010, the default rates came in at 0.1 and 0.2 percent after one year of seasoning – exceptionally low figures. The data for 2011 is not yet available, but several indications point towards possibly an even better loan performance than in 2009 and 2010. Though headline mortgage default news is driven by the souring loans from the bubble years, the default rates among recent borrowers have been at historic lows. Banks and the regulators need to understand this important distinction and permit more loans to flow into the market.