There are some great advantages that come with owning a home. Things like the ability to make improvements to your home increased wealth due to an increase in your home House value over the years and certain tax benefits. But what if you recently bought a home, are the closing costs tax deductible? Before answering this question, it is important to know what the closing costs are and what is usually included.
What are closing costs?
Closing costs are the fees that you pay when you get a mortgage loan. Typical closing costs are between 2% and 5% of your loan amount. For example, on a $ 250,000 loan, you will pay close costs between $ 5,000 and $ 12,500.
The following are usually included in the closing costs:
These are fees that homeowners pay to the state, county, and even various local organizations to fund the school district you will be living in, to repair roads and keep them in good condition, and to run the local library finance, to name a few. The amount of tax depends on where you live and the amenities available in your community.
Typically, you are responsible for paying property taxes from the date of closing and the seller pays from January through the date of closing. Your lender will typically collect property tax from you between three and six months at the time of closing. This is to ensure that there is enough escrow account to pay the tax bill when it is due.
Recording fees are charged by the county to record the documents related to the transfer of ownership of the property. This happens every time a home is bought or sold.
Loan origination fee
This is a fee charged by the lender as compensation for handling your mortgage loan from start to finish. The amount of this fee varies from lender to lender.
This insurance usually protects losses related to property. It is required of the lender so that they know the property is protected. The cost of this insurance will vary depending on the value of your home and the amount of coverage you have for the property.
Primary mortgage insurance
Lenders require PMI (Primary mortgage insurance) on conventional loans, if the borrower does not use at least 20% of the sale price for the down payment. This insurance is a protection for the lender in case the loan should ever default. For a $ 250,000 home, you would need to pay a $ 50,000 down payment to receive a 20% down payment. Otherwise, you will be charged a PMI.
The rating gives the lender an independent opinion on the value of the home. It is provided by a professional trained to appreciate real estate value. The Home appraisal process offers the lender peace of mind that the amount they are lending will not exceed the value of the property.
Credit Report Fee
The credit report provides the lender with information about your creditworthiness and creditworthiness. If your score is too low, it will affect your ability to secure funding and can cost you your ability to get the best interest rate available.
The flood inspection determines whether the property you have purchased is in a flood area. In this case, flood insurance is required.
Your lender becomes one Pest inspection if the appraiser notices an infestation with termites or other pests after completing the assessment. In some countries, all stores require pest inspection.
The title search is performed by a Title company. It is your responsibility to ensure that the title of the house is clear, which means that there are no defects in the title or issues that would prevent the title from transferring to you at the time of purchase.
You will need two types of property insurance when buying a home. The first type protects your lender (lender’s title policy) in case something was overlooked during the title search. The second type of property insurance is owner property insurance. This protects you from any shortcomings or problems in the title, just as the lender’s title policy protects the lender.
If you have questions about property lines, the title company can order a survey.
Discount fee or points
When you pay points for yours Mortgage loanIt is also known as buying the loan. These fees paid to your lender lower the interest rate on your loan. One point corresponds to 1% of the loan amount. In our example of a $ 250,000 loan, you would pay $ 2,500 to buy the loan by one point. The amount that one percent less will affect your interest rate depends on the lender, the type of loan, and the current mortgage rates.
The trust company is responsible for handling all funds required to purchase your new home. They ensure that all parties involved in the transaction are paid correctly. The fee charged by the trust company, also known as a closing fee or a settlement fee, pays for their participation in the transaction.
Prepaid daily interest fees
At the time of closing, borrowers pay interest on their loan from that date through the end of the month. If your deadline is towards the end of the month, you’ll pay less tax than if you took out your loan in the first week of the month. The seller is responsible for paying interest from the first of the month to the closing date.
Are acquisition costs tax deductible?
Not all acquisition costs are tax deductible and the tax code changes frequently. Therefore, contact a tax advisor to determine which deductions apply to your situation. Here are some typical closing costs that may be deductible from your taxes this year:
This deduction allows you to deduct the amount of interest that you pay when you buy your new home. It’s one of the best tax deductions for buyers. Your tax advisor can help you with any questions you may have about this deduction.
Primary Mortgage Insurance (PMI)
The PMI deduction is permitted until 2020. After 2020, these closing costs will no longer be tax deductible unless they are extended by Congress.
All discount points that you paid when you took out your loan are tax deductible. You should consult or visit your tax advisor IRS website to see if you can make this deduction in the year you bought the home or if you need to deduct the points over the life of the loan.
State and local property taxes
This deduction includes state and local taxes as well as property taxes. Again, you need to consult or visit your tax advisor IRS website.
Your tax advisor will determine whether it is in your best interests to take the standard deduction rather than listing your deductions in the year you buy your home. The IRS has established standard withholding amounts for each taxpayer category. If the standard deduction for your situation is greater than a listing, it will be beneficial for you to use the standard deduction and vice versa.
The homeowner tax breaks don’t end when you buy your home. If you work from home, the IRS allows one too Home office deduction. And should you decide to install solar panels or other energy efficient enhancements to your home later, there may be another deduction that may apply to your situation, called an energy efficient residential home loan. Always speak to a tax advisor to make sure you are taking full advantage of the latest tax codes.