We are avid proponents of aligning your desire for a new home with sound financial planning. If you are thinking about buying a home, but feeling overwhelmed by current interest rates, here’s a thought that might lessen your anxiety.
While higher interest rates may seem like a financial drawback, they can actually come with a silver lining in the form of increased tax deductions. We sat down with CPA Lisa Bell to discuss what that means and how to take advantage of it.
Starting with a Great Mortgage Rate:
Before we get into tax advantages, let’s briefly cover how to lower your mortgage payment. The rate you can expect to receive is contingent on your credit score and your debt to income ratio. So, start by improving your credit. You can try out the Experian Boost Program which will allow you to improve your credit by a few points based on any recurring bills that are in good standing. Additionally, paying your credit cards down to at least 60% of the maximum balance helps.
If you can improve your credit and keep your debt to income ratio at or below 36%, you are likely to qualify for better interest rates.
Shop around and compare rates from various lenders, including banks, credit unions, and online. Consider a shorter loan term, as shorter terms typically come with lower interest rates.
Make a larger down payment if possible, as this can also contribute to a lower interest rate. If you have substantial equity in an existing home, you can use that to pay down your loan. And don't forget to negotiate with lenders to ensure you're getting the most competitive rate based on your financial profile and the current market conditions.
Understanding the Connection:
Generally speaking, higher current mortgage rates mean higher monthly mortgage payments. While, on the front end this may seem like a financial burden, if you think about it from a tax standpoint, higher mortgage payments mean less taxable income so therefore less income tax at the end of the year.
There is also the mortgage interest deduction to consider. You will receive a tax deduction at the end of each year to cover the amount of interest you paid. Higher interest rates mean a higher tax deduction.
Remember, the degree of tax benefit you might receive largely depends on your tax bracket.
Also, remember that while almost all homeowners qualify for the mortgage interest tax deduction, you can only claim it if you itemize your deductions on your federal income tax return by filing a Schedule A with your Form 1040 or an equivalent form.
Reaching Out for Support:
Sitting down with a Certified Public Accountant (CPA) early in the home-buying process to assess how much of an advantage a home purchase might bring you is a great way to build a solid home buying strategy.
You should provide your CPA with information about the potential home purchase, including the mortgage terms and expected interest rates. Your CPA can then perform a comprehensive analysis, factoring in your specific financial situation and tax implications.
Potential Tax Deductions Beyond Interest Rates:
While higher interest rates offer a significant avenue for tax deductions, it's essential to consider other potential tax benefits associated with homeownership. These may include property tax deductions, mortgage points deductions, and even energy-efficient home improvements. A well-informed discussion with your CPA can uncover additional avenues for maximizing tax advantages.
By understanding and unlocking the tax benefits of home ownership, higher interest rates can become a tool for financial empowerment, making your dream of homeownership not only emotionally rewarding but also financially savvy.
Thank you to Lisa Bell for her contributions to this article. You can learn more about her at Copilot CPA.
