Homeownership marks one of the biggest milestones in life for many people. It can also be one of the most intimidating and stressful experiences, especially for first-time home buyers. But there are some definite perks to owning a home, and some extra benefits that await first-time homebuyers.
If you’re purchasing your first home, here’s what you should know about the financial benefits available to homeowners and first-time buyers.
Tax Deductions* & Savings
Mortgage interest — This benefit allows you to deduct any interest you pay toward your home mortgage from your taxable income. There are a few exceptions. This rule doesn’t apply to homeowners with a mortgage over $1 million who purchased their home prior to 2018, or homeowners who purchased after Jan. 1, 2018 with a mortgage over $750,000. If you are considering purchasing a more expensive home in the near future, plan to make a larger down payment to keep your mortgage below the $750,000 mortgage interest deduction cap.
If you are married, this deduction comes whether you own the home, your spouse does or you own it together. At the end of the year, your lender will send you a form 1098, which shows just how much interest you paid during the year.
Points — Points are essentially extra interest that you pay at closing to secure a lower interest rate on your mortgage. If you meet the long list of criteria for points deductions, you may qualify in the year you pay them. A few of the key qualifications for this deduction include that points must be on a secured loan on your main home. In addition, they must be used to purchase or build your primary residence.
PMI — This tax deduction does not apply to every homeowner, but in some years, depending on your income, you may qualify to deduct what you paid toward private mortgage insurance during the year. PMI is a requirement on some loans, such as FHA loans or loans with a down payment under 20%. Consult with your tax professional to find out if you are eligible to deduct PMI on your taxes.
Real estate taxes — With the new tax law, homeowners are eligible to deduct any amount paid out of pocket or out of your escrow account toward property taxes up to $10,000. (In the past, homeowners could deduct the full amount.) Again, this number will be included in the form 1098 issued by your lender at the end of the year.
Itemized Deductions — The standard deduction nearly doubled in 2018, so this applies to fewer homeowners. If your mortgage insurance and other deductible amounts paid toward points or PMI push you over the amount of the standard deduction, then be sure to tally up any charitable donations, medical expenses or unreimbursed job expenses, as these only matter to those who choose to itemize their deductions.
Additional Perks & Benefits
Penalty-free IRA payouts for first-time homebuyers — If you’re building or buying your first home, no matter your age, you can withdraw up to $10,000 from your retirement account penalty-free to put toward the purchase of your new home. To qualify, the money must be used within 120 days from when it’s withdrawn. It’s important to note that although you won’t pay the 10% penalty, you will still be taxed on the distribution based on your tax bracket.
Penalty and tax-free Roth IRA payouts for first-time buyers — First-time homebuyers may be eligible to withdraw up to $10,000 from their Roth IRA account penalty and tax-free. To qualify, you must have had your Roth IRA for a minimum of five years prior to taking the withdraw.
Keep in mind that many of the perks for homebuyers are only accessible to people who use the home as their primary residence. So be sure to consult with your trusted tax professional and an experienced lender to find out what benefits await you with the purchase of your first home.
If you are purchasing your first home and don’t have cash or the equity of an existing home to use for a large down payment, there are several home loan programs that may be ideal for you. FHA loans, USDA loans and VA loans require little or no money down, which is often ideal for first-time buyers. Subsidized interest and limited fees may also be available to you as a first-time buyer. Contact a home loan expert at PrimeLending today to discuss your options.
*PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.