The Tax Benefits of Having a New Mortgage
Part of being a good mortgage officer is being a reliable source of information for your clients. In fact, many will say this might be the most important part, because trust is such an important factor for mortgage clients.
One way you can help educate your mortgage clients is to inform them about the ways purchasing a new home can affect their taxes in a positive way. Here are some talking points you should keep in mind when discussing tax season with your new mortgage clients.
Mortgage Interest Is Tax-Deductible
With most mortgages, the first half of the loan payments is applied largely to the interest on the loan with very little, if any, being applied to the principal. Once you hit the mid-way of your mortgage contract, less money will be applied to interest and more will go toward the principal.
The important thing your client needs to know is that in most cases, the interest paid on their mortgage is tax-deductible, if the loan meets IRS mortgage requirements. However, the IRS does place some limitations on how much your client can deduct per tax year.
Points Are Also Deductible
If your client is paying points at closing to help secure a lower interest rate on their mortgage, then those costs are also tax deductible. They are typically deducted on the first year’s taxes of owning the home, so if your client is paying $5,000 in points, then they can add that amount to their mortgage interest deduction for the tax year the home was purchased.
IRS Tax Limitations for New Mortgages
At the end of 2017, the IRS changed the tax limitations placed on new mortgages. For 2018 and beyond, the deductible interest for new loans is now limited to principal amounts of $750,000. If your clients are married and they file their taxes separately, then the limitation is cut in half.
For those with two homes, the limits are cumulative for the mortgage debt on both homes. For example, if your client has a $700k mortgage on their primary residence and a $400k mortgage on a summer home, they would not be able to deduct the entire amount of the combined interest on both of these mortgages.
Interest Deductions Must Be Itemized When Filing
To be eligible for the tax deductions on the interest paid, your clients will need to itemize their deductions for that year. This means they will need to include a Schedule A form to their 1040 tax return form. They need to include their interest and points deductions with all their other deductions on Schedule A, which this will reduce their taxable income.
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