There are several tax advantages to owning a home. Chief among these is the mortgage interest tax deduction.
As a homeowner, you will be able to deduct mortgage interest (which is going to be most of your monthly mortgage payment initially) on your federal tax return. You can also deduct points and the real estate taxes you pay on the home. Between these two deductions, mortgage interest and real estate taxes, most of your monthly shelter costs as a homeowner are going to be tax deductible.
Although the mortgage interest tax deduction will shrink a bit each year as more of your monthly mortgage payment goes toward principal, these tax advantages last for several years. And when you go to sell your home, any gain or profit you make on the sale up to $250,000 ($500,000 for married couples) is tax free as long as you have lived in the home as your primary residence for two out of the last five years.
Paying private mortgage insurance is a drag. But one big mistake many first-time home buyers make is draining their savings on a down payment and closing costs. It is more important to have a three- to six-month rainy day fund at the end of the process.
Waiting a bit to purchase a home in order to save more for a down payment is a good idea, but don’t sit too long on the sidelines. Interest rates are attractive, inventory is growing. Put down as large a down payment as you can without emptying your bank account. Paying mortgage insurance is not ideal, but if it leaves you with a rainy day fund, it’s OK.
Linda Goodspeed is a longtime real estate writer and author of “In and Out of Darkness.” Email her at firstname.lastname@example.org.
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