Question for the Money Doctors
Question submitted on Sep 26, 2011.
QuestionLooking to purchase a house at the start of the new year. I live and work in the Des Moines Iowa area so it will have to be in that area. I was pre-approved for 160k and am looking for a house right around that range. I know this is a great time to buy as the housing market is in the dumps and rates are at an all time low. I am saving for my down payment which will need to be 3.5% with a 30 year fixed FHA loan. I have done alot of research on first time home buying but I am curious if there are any tax breaks or other options I should consider when searching for the right house? Any feedback you provide me will be greatly appreciated.
Not knowing your marital status, living situation or tax bracket, let's assume that you are currently taking the standard deduction on your tax returns and rent your current residence. Further, after purchasing the home, you will be able to itemize your deductions beginning in 2012, and not be subject to Alternative Minimum Tax (AMT).
The current available deductions are for the interest portion of the mortgage and the property taxes you pay on your home. One thing to watch out for is to make sure the FHA mortgage does not have a pre-payment penalty in the event you want to refinance or move in the the future. Let's say your 3.5% down payment covers your closing costs for the property. A mortgage for $160k at 4% for 30 years would have a payment of ~$764/month and is primarily interest in the early years. So you would be able to deduct over $6k per year as mortgage interest on your tax return. Also, your property taxes that would be around $3k per year on an assessment of $160k would also be able to be deducted. If you are in a combined 25% Federal and Iowa tax bracket, your net after tax cost of the mortgage and taxes would be about $10k annually. Add on a few hundred $ per year for homeowners insurance and you can compare this with renting. I.e. $850-875/mo would be the rent payment equivalent using this example.
Payments:(($764 * 12) + 3000) = $12,168. Deductions - income tax savings ((6k + 3k) * 25%) = $2,250. Net after tax cost of mortgage and property tax payments ($12,168 - $2,250 = $9,918)
Best wishes as you go through the search process for your new home.
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