Congratulations, you are living the American Dream! As a homeowner, you have many financial advantages and plenty of ways to save even more money. Whether you are looking for money-saving mortgage options, ways to pay your mortgage down faster, refinancing options, or beginning home improvements, it’s important to know all of your options to determine what will work best for you.
Financial Benefits of Being a Homeowner
As a homeowner, you have the advantages of receiving tax benefits, building home equity, refinancing, and making home improvements. By taking advantage of all these benefits, you can save yourself a lot of money.
Tax advantages
Tax advantages are one of the biggest financial benefits of homeownership. As a general rule, homeowners can deduct most or all of their interest payments on their home loan, property taxes, and loan points, but check with your tax advisor about your personal situation.
Mortgage interest
The interest paid on a home loan is usually tax-deductible and can mean real tax savings, especially in the early years of the home loan when most of the monthly payments go towards interest payments. Interest on first and second mortgages, home equity loans (up to $100,000), and refinanced loans are all usually deductible as well.
You should receive a statement from your lender (called a Form 1098) by the end of January each year, which lists the mortgage interest paid during the previous year. This is the amount that can potentially be deducted. If you itemize your deductions, check to see whether the standard federal deduction for you is larger than your mortgage interest deduction. Take whichever deduction is larger.
Property taxes
Property taxes, also called real estate taxes, may be deductible in the year they’re paid. They are generally reported on Form 1098 or on your county real estate tax assessment statement. You should also ask your tax advisor about deducting any prorated taxes you paid when you closed on your home. These amounts are not always included on Form 1098, but may be itemized on your real estate closing statement.
Loan points
Many homeowners pay points to the lender when they buy their home. These points can usually be deducted as a prepayment of interest. Loan origination fees and loan discount points are also usually deductible. Check with your tax advisor for more specifics.
Homestead exemption
This law, offered by some states, allows a property owner to exclude a fixed monetary amount from the assessed property value for tax purposes, which reduces the property tax owed. Homestead exemptions apply only to a person’s primary residence. In some states the exemption is automatic, but in other states you must file a claim in order to receive the exemption.
Home equity
As you pay down your mortgage, the value of your home increases, which builds equity in your home. Home equity is the current market value of a home minus any outstanding liens or home loan balances. For example, if your home’s market value is $300,000 and you owe $260,000 on your home loan, then you have $40,000 worth of equity in your home.
Using your equity as security
A home equity loan is a “second lien", and that allows you to borrow money against your equity by using your home as security for the loan. MITFCU offers low, fixed rate Home Equity Loans or Home Equity Lines of Credit (HELOC).
- Home Equity Loans
A home equity loan can be used for anything from paying off high-interest credit card debt to making home improvements. At MITFCU, we offer low, fixed rate Home Equity Loans where you can borrow up to 90% of your home’s value up to $175,000. - Home Equity Lines of Credit (HELOC)
A Home Equity Line of Credit allows you to withdraw money as you need it and only pay interest on the amount you withdraw. At MITFCU, you can borrow up to 90% of your home’s equity up to $175,000 and you choose whether the rate is monthly adjustable or annually adjustable.
Debt is secured by your home
Because the debt is secured by your home, usually all or part of the interest is deductible regardless of how you use your HELOC. See a tax advisor or call the IRS for details on the deductibility of interest on a HELOC.
Protect your home
If you are considering tapping into your equity, be sure that you clearly understand the terms of the loan. When you use your home as collateral for a loan, you generally have the right to cancel the credit transaction within three business days if you change your mind. Consider carefully: failure to repay at the end of the term could result in the loss of your home.
Should you refinance your mortgage?
To determine if refinancing your home mortgage is worthwhile, you should weigh the costs of refinancing against how long it will take you to gain those costs back. If the number of months you’ll stay in your home times your monthly mortgage payment savings (due to refinancing) is equal to your total refinancing cost, then you’ll break even on the deal.*
If you don’t stay long enough to recover your costs, refinancing is a bad strategy. The longer you stay past your breakeven point, the more you should lean towards refinancing. It is often considered ideal if you can recover your refinancing costs in one year or less.
*If your breakeven point is many years away, refinancing may not be beneficial, because the value of a dollar today (when you are paying refinancing costs) is greater than that of a future dollar (when you are realizing the savings). It’s also difficult to know whether you will still be living in your home many years from now.
Home Improvements and Repairing your House
Home improvements add value to your home, prolong its useful life, or adapt it to new uses. Examples of improvements include:
- Paving a driveway
- Paneling a den
- Putting up a fence
- Adding a bathroom
You should add the cost of improvements to the basis of your property. Your initial basis is usually what you paid for it originally and improvements increase your basis. If you sell your home in the future, improvements could lower your tax bite because any gain realized is reduced by additions to the basis of your property.
Repairs are different from improvements; repairs keep your home in good operating condition. They do not materially add to its value or substantially prolong its life, and you do not add their cost to the basis of your property. Examples of repairs include:
- Repainting your house (inside or out)
- Fixing your gutters
- Replacing broken window panes
Note: An entire repair job may be considered an improvement if items that would otherwise be considered repairs are done as part of extensive remodeling or restoration of your home.
As you can see, as a homeowner you receive many financial benefits and MITFCU offers plenty of ways to help you save even more. Contact our Real Estate Department today to get started!
