There are a lot of forms and documents to applying for a home loan, making an offer, and finalizing the purchase but, I want to make it as easy and as stress-free as possible and that starts by simply understanding the process.
Here are five financial perks of being a first-time homebuyer in Southern California.
#1. You may be able to deduct points on the home loan.
Points are prepaid interest they can be paid up front at closing to improve the rate of the mortgage. The more points the borrower pays the better deal the borrower can get. If you meet certain criteria you can deduct these points off on your taxes. These points must be within the range of what’s expected from where you are living as unusual transactions could cause you to lose this deduction.
#2. You may be able to deduct PMI.
This is called private mortgage insurance and it protects the bank in the event that the borrower defaults on the loan. This could be required as a condition of the type of mortgage you get as a first-time homebuyer such as an FHA. For most of the first years, PMI is not generally deductible but the rules can change annually. It depends on your income and what you claim is a tax deduction. You want to talk with your tax professional about deducting PMI if you can.
#3. Real estate taxes are tax-deductible.
Any real estate taxes from the state or local governments on the value of your property can usually be deducted. As a mortgage lender, we factor the cost of those taxes into an escrow account, which you then can deduct the amounts paid out of that account to cover taxes. If you don’t have an escrow account for these taxes, you can deduct what you pay out-of-pocket directly to the tax authority.
#4. Itemized deductions may benefit you more.
In addition to interest, points, and taxes, you can itemize deductions such as charitable donations, medical expenses, and unreimbursed job expenses. You’ll want to itemize if you have more total deductions than the standard deduction that you can take and most taxpayers don’t reach those numbers unless there homeowners. Any improvement you make on your home may also be deducted.
#5. The benefit of capital gains tax relief.
I know you’re probably not thinking of selling your home just yet, especially right after you bought it, but resell value is something you should consider when you choose the home. You can exclude some of the gain attributable to your home when you sell. You can avoid paying tax on up to $250,000 of profit or $500,000 for those filing married and jointly. As long as you have owned and lived in the home for two of the last five years you can avoid paying these taxes.
There are a lot of benefits to being a homeowner and tax purposes are just one of them. But, the sooner you start, the sooner you can start saving on your yearly taxes as well. If you’re interested in finding out what a home loan might cost you or if you just like to find out how much home you can afford, contact me anytime. Let’s run the numbers and find out what works in your favor.