On My Taxes, Is There A Limit To The Amount
On My Taxes, Is There A Limit To The Amount Of Mortgage Interest That I Can Deduct?
Each year, there is a limit as to the amount that an individual can deduct from their taxes in response to the amount of mortgage interest that the individual has paid over the course of the year. In the cases listed below, the average limitation has been defined. Some individuals will notice that they are further limited. This occurs in specific and individualized situations.
For these people, the specific limitations are calculated in a case-by-case basis. However, these limitations are well-defined for the general population and the cases that require extended limitations have been noted. Despite the fact that there are two different types of mortgages which can be taken out by individuals for their residencies, both loans are subject to limitations regarding the amount of interest that can be deducted, though the amounts do differ in quantity.
These two types of loans are defined by the situations to which they are applicable and have been created by the United States federal government in order to allow individuals ease in determining which type of mortgage or home loan they have taken out. It is very easy for an individual to use these definitions in order to determine the type of mortgage to which they are indebted by their financial institutions. First, there is the type of loan or mortgage that allows an individual to purchase a home or build a home on a specific location with the intention of the owner to live at the residency. This is known as home acquisition debt. The second type of mortgage loan is that which is used by individuals in order to refurbish or improve upon an existing residential structure. This is known as home equity debt.
Overall, the amount of interest that an individual may deduct on their taxes when it comes to home acquisition debt is not to exceed one million pounds (1,000,000.00), as specified by the government and the Internal Revenue Service. This is the standard interest limitation that has been declared for primary homes, as well as secondary residencies. However, the amount is reduced for individuals who are married and filing their taxes separately. A person who is married, but filing their taxes separately from their spouse, may not claim more than half-a-million pounds, or five hundred thousand pounds (500,000.00).
Home equity debt has a different amount put in place as the limitation. Main homes and secondary residencies may not have an interest deduction on one’s taxes that is in excess of one hundred thousand pounds (100,000.00). When individuals are married but filing their taxes separately, the amount is reduced by one-half. These specified individuals can not exceed a deduction of fifty thousand pounds (50,000).
Even with these limitations, some individuals have to be aware that they could be limited even further when it comes to the amount of interest that the individual may deduct in response to their home acquisition debt. This is the case when the home of an individual has a fair market value below the amount of debt that the individual possesses. This is calculated on a case-by-case basis and dependent upon specific situations. Limits are put in place based on the individuals loan amount, filing status and adjusted gross income in order to make sure that individuals receive the appropriately priced return.
Mortgages How Much Are You Really Borrowing?
How much are you paying back?
When considering a mortgage do you consider all of the right questions, for example do you consider which bank is best because of their reputation or do you instead look solely at the interest rate tables, do you look at the ability to switch mortgage provider or do you look at how long they can guarantee a given mortgage rate? These are of course all important questions and ones that should be given due consideration when choosing a mortgage provider but there are more important questions.
Most of us consider a mortgage to be one of life necessary evils, after all its not nice to be in debt to the tune of the house price right. Well theres actually one question that most people ignore, if youre borrowing 100,000.00 how much are you actually paying back?
The reason that most people ignore this fact when they consider choosing a mortgage, refinancing or embarking on any other kind of equity refinance is that on paper you are borrowing a given sum (100 K in this case).
Wrong!
You are borrowing a few thousand now but that is not the amount that youll be paying back.
This may seem like a bit of a nonsense statement but lets analyse it in a little detail.
We initially borrow 100,000
The interest rate is 4.25% – per year
Our repayments are the interest + 4%
We take the mortgagerefinance over 25 years.
So our yearly figures are as follows:
Year 1:
Interest = 100,000 100 * 4.25 = 4,250
Amortisation (paying back) =100,000 100 * 4 = 4,000
Total to pay back this year 8,250
So now in year two we only owe 96,000, so it looks like this:
Year2:
Interest = 96,000 100 * 4.25 = 4,080
Amortisation (paying back) =100,000 100 * 1 = 4,000
Total to pay back this year 8,080
So as you can see, theres less interest to pay because were clearing the initial balance, but still were paying 4.25% per year, so if we borrowed 100,000 to start with how much are we actually paying back in the end?
Were actually paying back 151,000 in the end, thats right, the interest on the mortgage is 51,000 doesnt seem such a good rate any more does it. But what if you decide to pay back over a longer period, that might help right? Wrong, if you double the term to 50 years (so paying back 2% per year), then the interest effectively doubles the amount of your mortgage to just over 200,000.
Now perhaps when people discuss getting the best rate for the mortgage and seem to be messing about for a few points difference you can see why, perhaps now you can also understand that it is better to take a mortgage over the shortest possible time frame it does mean that youll need to amortise faster but it also means that youll potentially save yourself thousands in interest payments.
If you are not financially in a position to really negotiate initially then perhaps one of the most important questions you should be asking is whether or not there is an early repayment option you might have enough money to pay it of early but whats the point if the bank will still charge you the same amount of interest?
If you want to run the simulation yourself heres the code in C#, simply create a new project, add a button, double click on the button and cutpaste the following code:
int years =25; years for mortgage
float mVal = 100000; total amount borrowed
float intRate = (float)3.00; interest rate
float result =0;
float totalAmountInt =0; total interest payable
float yearlyAmount = mVal years; repayment per year
for (int i = 1, i
I don’t seem to be able to post the rest of the code, email me and I’ll send it to you.
Mortgages. Short Term Advice
There are some new types of home loans coming onto the market which are being advertised at present. Several of the mortgage companies are offering variation of them and they are being marketed as lifetime loans. So might this be the end of the short-term mortgage? Not necessarily so, it appears that there are still bargains out there for those prepared to shop around.
Mortgage brokers usually advise discounted short term mortgages and advise clients to regularly shop around after the two year discount has come to an end to obtain an even better deal. These clients are known to the insurers as rate tarts. But who can blame them for obtaining the best possible deal, especially as the broker does all the work for them, making the whole procedure painless and trouble free.
First of all, if you need to borrow over 150,000 the above advice is still without a doubt the very best and asking your broker to shop around for discounted rates is, in our opinion, essential.
For borrowers of less than 150,000, some of these new mortgages appearing on the market initially sound tempting. They are classed as low-rate lifetime loans. Abbey and Woolwich are two of the building societies offering flat-rate low cost home loans, amongst others.
The Woolwich has a lifetime tracker mortgage rate which has a guarantee of staying at 0.19 percentage points above base rate. At present the Bank of Englands base rate is 4.50%, therefore the rate is 4.69%.
Conversely, the Portman Building Societys two year fixed rate plan presently stands at 4.19%, still cheaper than the Woolwich lifetime. You do, however, have to factor in the cost of shopping around, which we have listed:
Legal fees 350 on average.
Application fee 499.
Valuation fee 300 on average.
Deeds release fee 199.
This is worked out on a loan of 150,000. The above sums come to just under 1,350 and the saving on interest over the Woolwich comes out at 1,500. This means that there is a very small saving on the Portman deal at two years. You would need to find another tempting deal and be ready to switch to it at the end of this period as a 6.5 per cent rate would come into force otherwise.
Abbeys Flexible Plus tracker has a slightly higher rate than the Woolwich, at 5.09% but, as the name implies, it is very flexible and will allow you to reduce the amount of money borrowed by offsetting your mortgage and also permitting you to withdraw money from the mortgage. One advantage is that you can make use of the mortgage as a type of savings account. Money withdrawn is charged at the mortgage rate.
To sum up, these new loans do seem to be competitive, but the mortgage market alters all the time if youre out for the very best deals, check with your on-line broker and find out whats available out there. Theyll search the whole market and get you the very best deal. Thats what theyre there for!
Mortgages. Higher Lending Charges Are Outrageous.
After you scraped together a modest deposit for your new home you may think you’re home and dry. Think again. On top of there’s the surveyors and solicitors to pay. Then the government want a slice. You’ve got to pay stamp duty at 1% of the property’s price (if the house costs more than 250,000 the rate of stamp duty increases see the information at the foot of this article). Phew! You’re lucky you’ll just make it you’ll be a homeowner at last!
Then out of the blue the mortgage lender sends you a new bill another 1,500 please Sir. They’ve called it a Higher lending Charge (HLC) and it’s charged if you borrow more than 90% of the value of the house. About 75% of all mortgage lenders charge it and 1,500 is about the average they ask for.
And guess what they money you pay won’t benefit you in any way whatsoever! Not one jot. You’re being charged for a form of protection insurance that protects the mortgage lender, not you. The HLC pays the lender if you default on your mortgage, your property has to be repossessed and the sale proceeds are less than the outstanding balance on your mortgage. In theory the HLC then pays out the shortfall to the lender but in practice many lenders carry the risk themselves so the HLC is just an extra fee to offset a higher lending risk.
But an HLC doesn’t let you off the hook! If your home is repossessed and there’s a shortfall, you still have to pay the shortfall back to your lender – they’re sure to chase you for the money.
Whilst most of the lenders who charge HLC’s will readily agree to add the charge to your mortgage, that’s little consolation. In any case this means that you’ll end up paying interest on top of the charge. Then, over a 25-year term, your HLC will have cost you closer to 2,700!
In our opinion HLC’s should have died out with the dinosaurs. If a lender is worried you’ll default, they shouldn’t have lent the money in the first place. And with all today’s hi-tec credit checks and the risk based assessments used to process your application, you’d think the lenders were doing enough to protect themselves. In any case you may also end up paying a small interest premium for a 90% plus mortgage so in practice you’re being charged twice for the same risk!
The Nationwide Building Society, who incidentally do not charge HLC’s, recently reported that during the last five years 1 billion has been charged in HLC’s by some 800,000 borrowers. It also found that just over 500,000 were first time buyers largely youngsters struggling to buy a home. We believe that HLC’s are just another money making ploy for the mortgage lenders. By the way, the Higher Lending Charge used to be called a Mortgage Indemnity Guarantee, but they are all the same – only the name is different!
We think it’s time for the Office of Fair Trading to open up the box and take a look inside in the same way as they did with credit cards. The OFT recently ordered many credit cards to reduce their charges by up to 40%. A bit of that magic would do wonders for Higher Lending Charges!
Current Stamp Duty rates on house purchases in the UK
Houses under 125,000 No Stamp Duty
Houses 125,000 to 249,995* 1%
Houses 250,000 to 499,995* 3%
Houses over 500,000 4%
*HM Inland Revenue rounds up house prices to the nearest 5. Therefore, a house sold for between 249,996 and 249,999 will be rounded up to 250,000 and they’ll charge you 3% Stamp Duty on the lot!
Information correct as from the April Budget 2006.
Mortgages. Exit Fees To Be Capped.
In the last 3 to 5 years we have seen rises of up to 450% in the exit fees charged by lenders when borrowers redeem their mortgage. But at last the Financial Services Authority (FSA) ha seen the light and is going to crackdown on these increases.
Lenders have been telling new borrowers about the exit fees currently charged, but the lender has retained the right to increase those charges at any time and without advising borrowers. This amounts to a free hand to increase these charges and many lenders have taken the opportunity gladly.
Take the Woolwich for example; they’ve increased their exit fee from what was 95 to 275. The Cheltenham & Gloucester has increased theirs from 50 to 225. The lenders have clearly been trying to penalise those of us who regularly switch their mortgage to get the best interest rates the so called rate tarts and at the same time line their coffers.
However, the FSA is now in talks with the mortgage lenders to bring them to heal. The FSA wants fees to be fully disclosed at the outset and for the disclosed exit fee to be fixed for the duration of the mortgage. The FSA hopes to have agreed a binding undertaking from the lenders by June this year.
On a wider front, borrowers should always remember to take into account all the charges and money saving offers when working out which mortgage is cheapest for them.
To illustrate this point, let’s say you wanted a 2-year fixed rate mortgage and were attracted by the offers from the Northern Rock and the Halifax.
Northern Rock currently charges an interest rate of 4.19% plus a 1.5% arrangement fee and an exit fee of 250. Halifax’s interest rate is 4.39% with an arrangement fee of 499 and exit fee of 175. Within Halifax’s package there’s also a free valuation and free conveyancing that typically could save around 750. So which mortgage deal is the cheapest?
Taking a 25 year repayment mortgage for 100,000 and costing it over the first two years with redemption at the end of the second year, The Northern Rock comes out at 14,671. The Halifax comes out at 807 cheaper at 13,864. And this saving doesn’t take into account the extra 750 valuation and legal savings offered by the Halifax. Therefore, assessed on this basis, the 4.39% headline rate offered by the Halifax is in fact the cheaper deal.
Another issue that will affect the true cost of your mortgage is whether the interest is charged on a daily, monthly or annual basis. On an otherwise like for like basis, annually calculated interest will always work out more expensive because for 11 months of the year, you are charged interest on money you have already repaid.
The best advice is to read all the small print! And remember that the lenders use all sorts of words to describe charges – application, arrangement, reservation, booking, completion and early redemption are all words to described charges or fees. Keep your eyes skinned!
Mortgage Terms and Definitions
The mortgage process can be a little confusing if you aren’t familiar with the terms used in the process. To help you out, here is a list of terms with corresponding mortgage definitions.
Broker: An independent mortgage professional that oversees the entire home loan process.
Lender: The business entity providing and funding the home loan.
Processor: Prepares your loan for underwriting. The processor makes certain your income is properly documented and verified, the appraisal is being performed, and title and escrow are opened.
Escrow: Works with title to certify payoff demands for all existing liens. Escrow is an independent group which disburses monies to all parties in the loan transaction and ensures full payment.
Underwriters: Make the decision to approve or deny the loan. Hired by the lender, their job is to review all aspects of the loan based on the lender’s approval guidelines.
Automated Underwriting: A computer generated loan approval. This automated process only takes minutes and is the quickest path to approval.
ARM: Adjustable Rate Mortgage. An ARM has a fixed rate for a specified amount of time. After the initial term, the loan becomes adjustable and the rate can fluctuate depending on market conditions. ARM payments are initially lower than fixed rate payments. This is an excellent option for people with damaged credit, those who plan to sell their homes short term or who simply want to save money on their monthly payment.
DTI: Debt to Income Ratio or your total monthly debt in relation to your gross monthly income. For example if you have 2,500 in total monthly debts with a total income of 5,000, your DTI is 50%. The higher the DTI, the higher the lender’s risk and 50% is typically the maximum allowable DTI.
Equity — The amount of vested or owned interest in your property. Subtract the total balance owed on the property from the appraised value to determine your equity.
FICO Scores: Most lenders use the FICO scoring system to qualify borrowers. The FICO score is a number assigned from each of the three main credit repositories (Experian, Trans-Union, and Equifax). This number is calculated based on your complete credit profile and takes into account late payments, balances on trade lines, inquiries for additional credit, judgments, bankruptcies, total debt, length of credit history, and more. The lower the FICO score, the higher the lender’s risk.
LTV: Loan to Value Ratio. For example: a loan amount of 75,000 on a home valued at 100,000 equals an LTV of 75%. Your equity would equal 25,000, or 25%. The higher the LTV ratio, the higher the lender’s risk.
Stated Income: Your own statement of income on the application versus income that can be independently verified. Use of stated income is an excellent option for self-employed individuals or those with hard to prove income.
Getting a mortgage for a home purchase can be stressful. If you understand the lingo being used, you will find it less so.
Mortgage Shopping Tips
When shopping for a mortgage loan, every lender will have different rates, fees and points for each loan program. When shopping for a mortgage loan, it is important to understand the three components of a Rate and Fee Quote: (1) Premium Rates (2) Lender Fees and (3) Discount Points.
A Premium Rate offer is any interest rate above the market rate (referred to as the Par Rate). While the Par Rate changes constantly during the day, most lenders will commit to a specific Par Rate early in the day. If the Par Rate is 6.00%, the lender will only earn revenue if they offer you a rate above Par (for example, 6.25%).
Lender fees are charged for services performed directly by the lender, which may include Processing Fees, Underwriting Fees, Origination Fees, etc. These fees are charged to offset the cost of processing, closing, and funding your mortgage loan.
Discount Points often represent the largest fees associated with your mortgage loan as one point equals 1% of your loan amount. If you are applying for a loan amount of 350,000 and pay 2 Discount Points, the Discount Point Fee would be 7,000. Borrowers may use Discount Points to obtain rates below the Par Rate. For example, if the Par Rate is 6.00%, a 5.75% rate would indicate that the Borrower will have to pay Discount Points.
Factors to Consider
Every lender provides multiple combinations of Rates, Fees, and Points across a variety of different programs. All of these choices can become overwhelming when trying to decide between different programs, rates, and fee packages. To limit the possibilities, it is often helpful to answer a few key questions:
How long do you expect to have this loan? Consider the probability of relocation, moving, or refinancing when determining your timeframe. Think in terms of 5 and 10 years.
Do you have the available cash to pay additional fees now to lower the interest charges later? Be sure that paying upfront fees is the best use of your money. For example, paying higher fees or points for a lower rate may not be a good use of cash while carrying high credit card balances.
If you expect to have the mortgage a long time, paying points to reduce the rate makes economic sense because you are going to enjoy the lower rate for a long time. If your time horizon is short, avoid points and pay the higher rate because you won’t be paying it for long.
If you plan to have your loan for 5 years, paying 1 Discount Point on a 350,000 loan will cost you 3,500 upfront while saving you 88 a month. After 40 months of savings, you have recovered your upfront cost and will benefit from the lower rate. If you stay in the loan for 10 years, you will have created an additional 7,060 in interest savings over the life of your loan. Just like interest, points are 100% tax deductible in the year you pay them.
The second factor is your opportunity cost. What could you do with the money if you didn’t use it to pay points? Even if you expect to be in your house a long time, there could be other uses for your money that take precedence over the long-run savings from a lower interest rate. A useful way to pull these factors together is to look at the payment of points as an investment that yields a return that rises the longer you stay in your house.
Mortgage Rescue Scams Are On The Rise
One type of mortgage rescue scam involves a predatory real estate investor stealing the equity a victim has built up in their home. Typically, the scammer will tell the victim they want to help save the home from foreclosure. This real estate investor will tell the victim he or she will buy the house personally, or will arrange to have another investor purchase the house.
The scammer promises to lease the house back to the victim for a period of 12 to 24 months to allow the victim to recover financially, repair their credit, find a better job, etc. They say that after the victim is economically healthy they will sell the house back at the end of the lease.
The real estate investor will often also attempt to sell credit repair services, mortgage broker services, and job placement services to the victim as part of the scam. Eventually, the scammer will force the victim out of their home and then sell the house, keeping the equity for themselves.
Government officials are seeing more of this type of criminal scam as mortgage rates increase and increasing numbers of homeowners are facing higher mortgage payments.
The scammers often use company names reflective of church affiliations. Often they use connections through social organizations or churches to meet victims.
Another type of mortgage rescue scam is a lease back transaction built on a series of lies. The scammer has no intention that the victim will be able to avoid losing the home. The scammer leases the house back to the victim with lease payments as high, or higher than the mortgage payments the victim was failing to make in the first place.
The scammer will often fail to provide the promised credit repair services, mortgage broker services, or job placement services that would be needed to put the victim in a position to repurchase the property at the end of the lease. As soon as a lease payment is missed the scammer will move to have the homeowner evicted.
Once the homeowner is evicted, the scammer will sell the house, pay off the underlying mortgage, and keep the equity. The victim end up with ruined credit and any mortgage obligations not satisfied by the sale of the home in the scam transaction.
There are many other variations on this scam. Sometimes the scammer will purchase the house from the victim below market price. The loan application may claim that the scammer intends to occupy the house when, in fact, there is already an agreement to lease the house back to the seller which is not disclosed to the lender. This lie helps insure that the loan will be approved and will give the scammer a better interest rate on the mortgage than if it had been an investment loan.
Sometimes the scammer will use an investor to purchase the house with a mortgage loan at below market value. The investor, who is often another victim, will then immediately quit claim the house to the scammer, often for a fee being paid by the scammer. The investors loan application will often claim the property is to be owner occupied when there is a lease agreement already in place with the seller. The existence of the lease will not be disclosed to the lender.
Scammers find vulnerable people through marketing, public records, or personal networks. Marketing includes direct mailings, radio and TV ads, or simpler approaches such as posting fliers. Public records may be found at county recorders offices where notices of trustee sales are available to the public.
Personal networks often include churches or community organizations. Professional networks can be used to locate victims when the scammer is also a real estate agent, mortgage broker, loan officer, attorney, or appraiser with inside information about the victims vulnerable financial position and pending foreclosure.
If you know people involved in these types of scams, call the Department of Financial Institutions Enforcement Unit with details.