For years, the federal government has considered it important for Americans to own houses. Home ownership helps families build wealth, gives them a safe and stable place to stay, and creates communities of stakeholders who pull together to meet each other’s needs. Home ownership is so important, in fact, that the government does something exceptional to encourage people to own a house. It gives a big tax break.
Generally, the interest someone pays on their home loan is deducted on their federal income tax filings. Depending on a person’s income and how much they deduct, the savings can be substantial. It’s another reason why owning a home is one of the greatest wealth-building tools a person can have.
The United States Tax Code uses a lot of big words — it’s one of the most complicated parts of our legal system, after all — but the logic behind the mortgage interest deduction is simple: If you’re working to pay off a home, the government wants to give you a financial break.
For most people, interest paid on a home mortgage loan is deducted from their income so that they pay taxes as if they earned less money. If someone makes $50,000 per year, for example, and pay $5,000 in mortgage interest, they would only pay taxes on $45,000 of income.
That example may be overly simplified, and you should consult a tax professional to see how it would impact your specific situation. But’s safe to say the mortgage interest tax deduction is used by millions of Americans to reduce the amount of money they pay to the IRS. It’s a powerful incentive to buy a home and one that first-time homebuyers need to know about.
• 42 million taxpayers in the United States claimed a deduction for real estate taxes in 2008, deducting a total of $172 billion.
• The average taxpayer claiming the real estate tax deduction subtracted $4,090 from taxable income in 2008.
• Therefore the average taxpayer saved $1,020 in taxes as a result of the real estate tax deduction..
• The total savings from the real estate tax deduction in the United States in 2008 was $43 billion.
FIRST-TIME HOMEBUYER TIPS
FIND YOURSELF A GOOD AGENT
A good real estate agent makes a big difference with any home purchase, but especially for a first-time homebuyer.
Look for an agent who is not only well qualified and knowledgeable about the area you want to live in, but also one who is patient and takes the time to really get to know your needs.
After all, an important role of an agent — especially for inexperienced buyers — is that of a teacher.
REAL ESTATE GLOSSARY
BIWEEKLY MORTGAGE — A home loan that lets you make payments every two weeks, which can help you pay off your home faster over time.
SURVEY — A map or drawing that shows the exact legal dimensions of a property.
COLLATERAL — Property used to secure a loan. In the case of a mortgage, the home itself is the collateral.