Taxes are complicated enough before throwing a first time home buyer into the mix.
However, there are a number of tax breaks that home buyers should not skip over when they start to do their taxes. From mortgage points to energy upgrades, an investment now can turn into a little extra green come next April 15.
Deducting mortgage interest on taxes seems like an obvious choice, but it’s not quite as simple as it sounds.
People have to be careful how they plan out their mortgage interest deduction.
A first time home buyer has probably not itemized deductions before, which they have to do in order to claim mortgage interest.
Every couple’s standard deduction totaled $12,400, so the mortgage interest needs to exceed this number to be worthwhile.
For the first few years, however, many homeowners do not have a difficult time reaching that goal since they pay so much more in interest than they do in principal.
The next logical deduction is mortgage insurance.
Many home buyers do not need to pay Private Mortgage Insurance (PMI), but it is a common feature in a loan for a first time home buyer.
- Mortgage insurance is intended to protect the lender in case the debtor defaults on the original home loan.
- PMI is usually required when a home buyer makes a down payment of less than 20 percent at the initial time of purchase.
This typically includes first time home buyers because they do not have the equity or proceeds of a previous home sale to use as a down payment. While PMI can cost $100 a month or more, this expense is also tax-deductible.
Many buyers want to buy a few new appliances or equipment to outfit the home, whether it is new or previously owned.
The good news is that purchasing energy-efficient models can pay off. Through the end of 2016, the Residential Renewable Energy Tax Credit rewards homeowners who buy and install machinery running on:
and other renewable energy sources.
The credit is worth as much as 30 percent of the cost of the purchase.
It’s true that points can sound much like a drain bleeding away the last vestiges of money that a homeowner has to spare after closing.
However, paying down a few points can make a big difference in the mortgage’s overall interest rate.
Paying a discount point means that the home buyer agrees to pay 1 percent of the loan amount in exchange for dropping the interest rate by 0.25 percent.
With rates currently hovering just under 4 percent for a 30-year fixed loan, according to Bankrate, paying down some points helps homeowners secure a very nice rate for the long haul. Plus, discount points are tax deductible, so the pinch at closing is not quite as painful.
A first time home buyer deserves all the luck in the world with this new life experience. A few of these juicy tax breaks won’t hurt, either.