When getting a mortgage and the impacts there is a lot to consider. Austin Community College District (ACC) experts share tips on what you should know before taking the next step.

Written by: Job Hammond, ACC Real Estate Professor

Published article in MoneyGeek

Mortgage Tax Benefits

The term ‘points’ is often used in mortgages. Can you explain this and whether they are eligible for tax deductions?

Owning a home with a mortgage can offer significant tax benefits. One key advantage is the ability to deduct mortgage points, also known as discount points, which can lower your monthly payments and overall interest costs.

Mortgage points are fees paid upfront to reduce your mortgage interest rate. One point is equal to 1% of the loan amount. For example, on a $200,000 loan, one point would cost $2,000. Despite the name, discount points are not a direct discount but a prepayment of interest to secure a lower rate.

The Internal Revenue Service (IRS) allows homeowners to deduct the cost of mortgage points on their primary residence. When the points are paid, this deduction can be claimed in the tax year. By deducting mortgage points, you can potentially lower your taxable income, reducing your tax liability.

How can homeowners leverage these tax benefits to their advantage?

Paying for mortgage points can have multiple financial advantages.

• Lower Monthly Payments: By reducing your interest rate, your monthly mortgage payments will be lower.
• Reduced Total Interest: Over the life of the loan, you’ll pay less in total interest, saving you money in the long run.

Leveraging the tax benefits of mortgage points can make homeownership more affordable and provide substantial savings. If you’re considering a mortgage, consult with a tax professional to understand how purchasing points can benefit your financial situation.

What Is a Mortgage?

How do mortgage lenders assess the creditworthiness of a borrower, and what impact does this have on the interest rate offered?

The term “mortgage” originally comes from the Latin phrase meaning “death pledge,” signifying a long-term commitment. Today, most mortgages can be paid off in 30 years or less, and lenders evaluate several key factors to determine your eligibility and loan terms.

A mortgage is a loan used to purchase a home, with the property as collateral. Lenders assess your creditworthiness based on your credit history and ability to repay the loan. These factors heavily influence the interest rate you receive.

Maintaining a strong credit history can save you significant money. For instance, a 1% higher interest rate on a $400,000 mortgage can result in nearly $100,000 more in interest paid over 30 years. Demonstrating responsible credit use can help you secure a lower interest rate, reducing your overall costs.

What are some of the most common mistakes that consumers make when applying for a mortgage, and how can these be avoided?

Avoiding Common Mortgage Approval Mistakes:

• Meet with Your Lender Early: Review your financial situation and budget for future needs. Getting a pre-approval letter before house hunting shows sellers you’re a serious buyer. Ensure that you can afford the payment and have sufficient down payment and reserve funds available.
• Explore Loan Options: Consider different types of loans, such as fixed-rate, adjustable-rate and government-backed loans from the Federal Housing Administration (FHA) and the US Department of Veterans Affairs (VA).
• Avoid Major Purchases: Once your home is under contract, refrain from making large purchases like cars or furniture until after closing. These can impact your debt-to-income ratio and loan approval.
• Maintain Employment Stability: Lenders look for a steady employment history. Changing jobs during the mortgage process can raise concerns and potentially delay or jeopardize your approval.

What are the common factors that lead to mortgage application denials? How can consumers increase their chances of getting approved for a mortgage?

Improve Your Financial Profile:

• Boost Your Credit Score: Pay down debts and avoid late payments.
• Reduce Debts: Lower your overall debt load to improve your debt-to-income ratio.
• Limit New Credit Inquiries: Avoid opening new credit accounts or applying for new loans during the mortgage process.

Understanding these factors and taking proactive steps can increase your chances of securing mortgage approval and getting the best terms for your dream home.

Tags: ACC Experts, MoneyGeek, Real Estate