Should I Buy or Refinance now?

Interest rates are low and the housing market is moving quickly.

Yes, you can deduct your mortgage interest and real estate taxes, and refinancing can lower your interest due amount. But, what else does owning a home mean to you? And, how can it help you in the world of taxes? Follow our trail of homeowner advantages to buying or refinancing a home now.

Owning a Home can mean a Bigger Paycheck.
Yes, it’s true. That mortgage interest deduction helps in more ways than one and you may not have to wait until you file your return to reap the benefits. You can pocket your tax savings right away by providing a revised W-4 form to your employer. Your W-4 information determines the amount of tax your employer withholds from your paycheck. Taking advantage of the penalty exception for IRA withdrawal for first time homebuyers. For first time homebuyers (someone who hasn’t owned a home for two consecutive years), there are also tax advantages. If you are a first time homebuyer and you have an IRA there is good news. You can withdraw up to $10,000 from your IRA and not be penalized. The early withdrawal penalty is waived on up to $10,000 withdrawn to buy a first home. Of course, you will still have to pay taxes on the money you withdraw (unless you replace it within 60 days of withdrawal), but having a down payment cuts down the interest you will pay on a mortgage. It might be worth looking into.

Remember, when considering this option you should weigh the lower interest paid against the lower income available for retirement. Contact an accountant or tax professional for more information.

Refinancing: Is it Worth the Cost?
Here you go again. The interest rates are down, but you’re not sure the cost is worth refinancing - what should you do.

Refinancing does incur costs such as appraisal fees, points (if any), title search and insurance, and mortgage insurance; however, if you’ve done your homework the good news is that you can still save money. The savings in interest acquired in refinancing is worth more than your deduction for the amount of interest. And you may have a larger deduction than you think; any points you paid to refinance are deductible as mortgage interest, prorated over the term of your loan. Moreover, if you have not yet deducted all of the points paid to obtain the prior mortgage, you can deduct the balance this year. You can do this because the term of the prior mortgage ended when you paid it off. For example, Donna and Larry owned their home only six months when interest rates went down (they were paying 8.375 percent for a 30-year mortgage). They were able to refinance at a rate of 6.75 percent on a 20-year mortgage. Even though there wasn’t the standard two percent difference in rates, they were able to increase the amount applied to their principal by $200 per month and their actual monthly mortgage payment dropped by $30, thus saving thousands of dollars in interest payments and in their monthly payments.

The Final Payoff in Home Buying:
To all beginnings there is an end and this needs to be considered when buying a home. Somewhere down the road due to job changes, larger families or some other factor, you might have to sell this house you are considering buying. But being a homeowner gives you one more option and that is the sale of home exclusion. If you buy or own a home now, you have a tax-free savings vehicle. That’s because the current law allows taxpayers to exclude gain of up to $250,000 ($500,000 for a married couple) if the ownership and use tests are met. Those two tests require taxpayers to own and live in their home for two out of the last five years. And the exclusion can be used every two years. Theoretically, you could buy a home in an area that is appreciating in value, live in it for at least two years, sell it, exclude up to $250,000 of gain of the sale and start the cycle over again.