Mortgages
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. 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.
Mortgage Rates – The Benefits of Refinancing
So you’ve lived in your home for some time now and have been content mailing off your mortgage payment every month. Yet when you turn on the nightly news you see that mortgage rates are 1% lower than what you locked into 10 or 15 years ago and realize quickly that you may be paying more money than you have to in interest rates on your mortgage. For millions of people every year, refinancing is an option they take to give their mortgage a “health check” of sorts and to help them lock in lower rates or take advantage of increased property values to make some improvements to their homes.
Nobody likes to pay more than their neighbor did for something – especially their house! Refinancing is an activity that is as much a part of the mortgage process nowadays as taking out a mortgage is to buy a new home. A smart homeowner knows that interest rates will rise and fall and that by keeping track of where they are currently they can save a lot of money over the life of their mortgage note by locking in a lower mortgage rate now, even if it means paying a little money up front. Refinancing helps millions of homeowners get lower rates on their mortgages by paying off their old mortgage and writing a new one.
Of course, as with any financial transaction, you should carefully review all the costs associated with refinancing and the potential benefits versus the risks. Typically, if you only have a few years left on your mortgage note then refinancing is not for you – you simply won’t save enough in interest to make up for the fees you have to pay to rewrite your mortgage. The best time to refinancing, according to some experts, is when at least 40% of your monthly mortgage payment is still going towards interest fees.
If you do decide to refinance it is important to remember all the tricks we’ve talked about before when shopping around for a mortgage. Get plenty of competitive bids, keep a close eye on the fees, and be sure to read and understand the risks involved.
Another reason that many homeowners refinance their mortgages is to take advantage of increased property values as to “cash out” on some of the equity. Say you have a child who is ready for college and you need a way to pay for it. Your home, with cost 100,000 twenty years ago when you took out your 30-year mortgage may now be worth 200,000. By refinancing you can in essence write yourself a check to pay for home repairs or other needs and get the money easier at a better rate then taking out a 2nd mortgage.
For those who use it wisely, refinancing can be one of the best financial tools you have. Not only does it hold the potential to help you save thousands of pounds in interest charges by getting you a lower rate, but it also lets you take advantage of increased property values to help pay for other necessary items that come up in life. Yet another reason why owning a home is truly one of the best financial moves you will ever make.