|
|
 |
|
 |
||
|
|
|
|
|
|
||
Home Loans and Mortgages - The Myth of Tax Deductible Interest
Home ownership has risen sharply in recent years, and the percentage of Americans who own their own homes is approaching a record seventy percent. That?s a good thing; we?d all rather live in our own home than consider the alternatives. The most common method of purchasing a home is by taking out a mortgage. Mortgage types vary, but most loans consist of some variation of a thirty-year loan, with interest applied to the purchase price. This added interest can easily cause the total sum paid to be double or triple the actual purchase price of the home. This is an unavoidable cost of borrowing a large sum of money over a long period of time, but it still causes alarm at closing time when the borrower realizes that his or her $150,000 home will cost a half million dollars by the time the loan is paid off. At this point, the lender usually points out that the interest is tax deductible, and the borrower offers a sigh of relief. Is the deductibility of the interest really that big of a deal? Does anyone really benefit from it?
Without question, the best way to pay for a home is to pay cash. It?s the cheapest way to buy a home and once you pay for it, you are done. Few Americans are in a position to do so, however. Homes are expensive. And depending on economic conditions, it may actually be cheaper to take out a loan than to pay cash. If you could borrow money for thirty years at six percent and invest money at ten percent, you?d be better off borrowing and investing instead of paying cash. But lenders and others who mean well often mention that tax deduction as though it should be a deciding factor in how a home is purchased.
The interest on a primary residence is deductible on loans of up to one million dollars. That means that the amount of interest paid in a calendar year can be deducted from taxable income, effectively reducing the amount of income tax paid. More often than not, this turns out to be of little benefit to taxpayers. It?s not as though the Government is paying your interest. For the typical American taxpayer who pays in the 28% tax bracket, the deduction amounts to a rebate of twenty eight cents for every dollar paid in interest. Complicating matters is the fact that this is only true for that portion of the interest that exceeds the standard deduction allowed for every taxpayer that files. That deduction, currently $10,000 per married couple, is usually greater than the amount of mortgage interest most couples pay during the year. What this means is that many, if not most, Americans derive no tax benefit from their mortgage interest whatsoever.
Of course, homeowners who pay more than 28% of their income in taxes or those who own homes with large mortgages can benefit more from the tax deduction. Most American homeowners, on the other hand, get nothing from it. The tax deduction isn?t entirely insignificant, but it shouldn?t be a deciding factor in determining how to pay for a home. Prospective buyers should realize that while the deduction is a potential perk of taking out a mortgage, the likely tax benefit from it ranges from ?very small? to ?nothing at all.?
Home Equity Loans Can Provide Cash in a Hurry
Think About the Long Term. Estimate how long you expect to stay in your current house. Depending on the severity of your situation and the real estate market at the moment, you might even want to considering selling your home altogether and taking on a short term rental in your new locale. If you expect to stay in your current home for a few more years, the flexibility of a home equity loan may work for you.
How Much Cash Do You Need? A flexible home equity loan or line of credit may allow you to write checks for only the amount you need to get by. If you experienced a job loss, you can borrow against your equity in smaller chunks and repay your loan quickly once you get back on your feet. Opening a new loan with your local bank can also provide you with a critical source of cash that can help you make credit card payments on time, preserving your credit score.
Budget for Loan Expenses. Although a short-term home equity loan may carry a higher interest rate, you may be able to pay it back fairly quickly and avoid some of the long-term expenses it brings. Review your monthly budget to find a regular payment that you can live with. Experienced lenders can often customize home equity loans to fit just about any repayment scenario.
Watch for Hidden Penalties. Some unscrupulous lenders try to lock homeowners into loans that require stiff pre-payment penalties. Make sure your lender guarantees you that interest accrues only on the outstanding balance of your loan. Check your contract carefully to make sure that you can pay back the money you have borrowed on your own schedule.
Look for Bonus Perks. Many lenders are locked in heated competition for home equity loans. Along with the potential tax benefits that home loans provide, many banks and private companies have offered new customers added benefits. The days when banks gave away toasters are long past. Instead, some new loan accounts generate frequent flyer miles or access to free banking and investment services. Be sure to ask your prospective lender about any special bonuses that might break a tie with their competitors.
Mortgage Research Good News for House Buyers
Figures from the Council of Mortgage Lenders show that in July gross lending in totalled ?25.2 billion, with fixed rate deal mortgages are at their most popular for nearly six years.
Nonetheless, Julys growth in lending to individuals slowed from the recent trend, said British Bankers Association (BBA) spokesman David Dooks, ?this could have reflected consumers waiting for the widely anticipated cut in interest rates.
Miles Shipside, Commercial Director of Rightmove, comments, ?The belated but welcome drop in interest rates will be a real boost for sentiment in the market and a springboard for a better 2006.?
However, more than half of all mortgage lenders have failed to pass on the full Bank of England interest rate cut to borrowers, and those that haven?t done so already look unlikely to do so in the future.
?How these things usually work is that if the lender is going to pass on the full cut they announce so fairly quickly?, Ray Boulger of John Charcol mortgage advisers.
Several lenders stated the rates on fixed mortgage deals from some providers had already started to drop in anticipation of the cut in interest rates earlier this month, while others argued that replicating the rate cut is not necessary because they did not pass on past increases.
A few lenders, including the Halifax, the UKs largest mortgage lender, immediately reduced its rates, but others have held off cutting borrowing costs or have trimmed them by less than the banks quarter of a percent.
Despite the rate cut anticipation and the increases in the take-up of fixed rate deals, the British Bankers Association (BBA) said that net mortgage lending by its own members slowed down last month.
Rightmove in its latest house price index has indicated that house sales have slowed down. The numbers of completed sales for the three months from April to June are the lowest since 1998. To improve the chances of achieving sales, many new sellers are adjusting their prices in an attempt to undercut the competition. Asking prices have now dropped by an average of 1.2% over the past two consecutive months.
Rightmove believe that the housing market is gradually recovering, but ?there is currently too much unsold property still available to expect anything other than a continuation of static asking prices this year?.
Miles Shipside adds, ?Sellers are finally becoming more realistic on their asking prices, which when combined with cheaper mortgages and rising wages, means that more buyers can now afford to enter the market.? He went on to point out that, ?We still need more first time buyers for the long term health of the property market.?
Financial comparison site, Moneynet, puts the current first time buyers? average joint salary at ?39,382, with an average mortgage amount required of ?135,239 constituting a 66% borrowing on the cost of a property. This means that with sellers asking prices remaining static, or even falling, and wages gradually rising, for many potential first time buyers, there is an increase in the realistic prospect of getting onto the property ladder.
Halifax hoped that the interest rate reduction by the Bank of England would, reduce mortgage payments as a proportion of gross income for the average new borrower from 20% to 19%, the average for the past 20 years and well below the 34% peak in 1990.
With the mortgage market especially competitive at present and rate comparison sources easily accessible, lenders who do not offer reasonable rates are liable to lose out. All this appears to be good news for buyers as Rightmove states, ?there are now clear signs that the market is making sensible adjustments in prices to improve buyers? affordability.?
 |
©Copyright
InsideTheWeb.All Rights Reserved.
|
 |
|
|
||
 |
Designed by kohj |
 |