According to the National Association of Realtors, the sale of homes in 2020 has increased by 22%! Many people are looking to purchase a home and for many, buying a home is one of the largest purchases they will make in their lifetime.
Many people cannot afford to buy a home outright, meaning they will need to secure a mortgage loan. A mortgage is a promissory note or agreement signed by a purchaser and lender, where the purchaser puts their home up as collateral for the loan. This is known as a secured loan. If a borrower stops making their mortgage payment, or defaults, the lender has the right to foreclose on (or repossess) the borrower’s home. The collateral involved lowers the risk associated with financing considerable amounts of money to borrowers and incentivizes borrowers to keep making their mortgage payments. A secured debt will have a lower the interest rate compared to unsecured debt, such as a credit card. Unsecured debt has no collateral associated with it which causes interest rates to be higher. Some credit cards could have rates higher than 20%.
How does a borrower obtain a mortgage loan? The lender will access the risk of financing a specific borrower by looking over the borrower’s financial history including credit score, tax returns, bank statements, debts, etc. to determine a financial position. For this reason, it is important for a borrower to be in the best financial standing to receive a deal or qualify with the lender at a lower, preferential interest rate.
Additionally, it is important for a borrower to understand what exactly is included in buying a home and obtaining a mortgage. Research is key to achieving an accurate view of the cost of buying a home. Below are key points and ingredients any buyer will need to outline a mortgage equation.
Questions to ask yourself and research:
There could be potential tax benefits to purchasing a home. The IRS allows taxpayers to itemize certain deductions on Schedule A of Form 1040. Taxpayers have the option of taking a standard deduction or itemized deductions (Schedule A) and should choose the option that provides the most advantage for their tax situation. For 2021, the standard deduction is $12,550 for single filing status and $25,100 for married filing jointly status.
On Schedule A, a taxpayer may report itemized deductions that originated with a mortgage or the personal ownership of a home:
Another tax benefit the IRS provides to Taxpayer when they sell their main residence is an exclusion of tax if there is a gain on sale. This is known as Section 121. For married couples, who file a joint tax return, you will not have to pay taxes on the first $500,000 of the gain on sale of your main residence. Anything above the floor of $500,000, will be subject to short-term or long-term Capital Gain Tax rates, depending on the holding period of the home. Single Filers have an exclusion of gain on sale of up to $250,000. You are allowed the claim the exclusion if the following requirement have been met: (1) Living in the main residence for the past two years out of the last five years, (2) Owned the home for the last two years of out the past five years, (3) and have not claimed the exclusion in the last 2 years. If you do not meet all the requirements, you may still qualify for a partial exclusion
Our team of professionals at ADKF have extensive experience working with individuals and assessing their financial position to provide personal financial planning, such as a new home purchase, or new business venture. Please reach out to us for assistance with any matter as we are “with you all the way.”