Welcome to this week's Buyer's Market. If you haven't already, check out our previous blogs in this series!
Last week's blog covered Equity and Force Savings!
This week we will take a look at mortgage interest and how it affects you.
You can deduct interest charged on a your initial home loan or any secondary loans you took to improve your principal residence. In the early years of a loan, most of your monthly payment is interest, so this can really add up. If you are in a 28% federal tax bracket, this can have the effect of lowering your borrowing costs by almost a third, depending on which state you live in.
In addition, you can deduct interest on an additional $100,000 of mortgage debt, which can be used for any purpose. This is called the "Home Equity Loan" exception, and it allows you to tap into your home equity for any purpose. This gives home owners the ability to do what is called "debt-shifting." For example, if you live in an apartment and have a credit card balance of $10,000 at 18% interest, none of that interest would be deductible. But if you owned a home, and you obtained a home equity loan for $10,000 and paid off the credit card, then ALL of the interest expense becomes automatically deductible. Furthermore, the rate on the home equity loan is likely to be very much lower than credit card rates.
This same technique works with any and all personal debt, from car loans to consolidation loans - with only one hitch. In every home equity loan, you have pledged your house as collateral for the loan. If you fail to pay the payments as agreed, you could lose your house to foreclosure. So be careful in using this technique. These interest deductions are truly a government subsidy to home owners.
Please join us next week for the next installment of Buyers Market when we take a look at the sale!
In the meantime, check out our website dedicated to giving first time home buyers like you all the information you need to make buying your first home a smart, well-informed, and pleasant experience.
If you have any questions feel free to contact us!