CHAPTER 8 Shopping for a Home Loan or a Home Loan
Buying a home puts you into a realm of unknowns, mainly if you used to rent. Owning a house is a whole new experience. For example, consider taxes and mortgages. When purchasing a home, it’s essential to understand what can be deducted and what can’t. A powerful piece of information many home buyers overlook is the effect of mortgage interest on their federal income tax payments. Mortgage interest is deductible and a powerful financial planning tool. Calculate the amount of mortgage interest deduction and include that in your annual financial planning. Then, check the Internal Revenue Service (IRS) Form 1098 from the lender at the end of the year. This form shows the amount of mortgage interest that you’ve paid. Some non-deductible items include home repairs, general closing charges, homeowners’ association dues, and property hazard insurance premiums. Getting a loan to purchase a home can be a tricky business, and there are terms one might find hard to understand — e.g., the term “mortgage points,” which refers to the interest that’s been prepaid. It’s possible to lower your mortgage loan’s interest rate by “buying points.” Mortgage or discount points are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is called “buying down the rate” and will decrease your monthly mortgage payments. One point costs 1% of your mortgage amount (or $1,000 for every $100,000). Essentially, you pay some interest upfront in exchange for a lower interest rate over the life of your loan. In 64
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