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Tips on Buying a Home
By Ed Hlavac, CTX Mortgage

Down payment: The initial mortgage(s) used to purchase a home establishes the “Acquisition Indebtedness” for tax deduction purposes. This is the base amount from which all future tax deductions will be judged. Down the road you will be allowed to deduct interest expense on the original loan amount(s), plus any home improvements (not repairs), plus a maximum of $100,000 of equity. With recent rapid appreciation, many people have large amounts of equity that, if tapped, could potentially not be deductible (unless used for investments).

Many loan programs today allow for up to 100% financing on a home. Rolling over large equity from a previous home can severely limit tax deductibility in the event of a future need to access that equity. Also, diversifying at least some of the down payment to alternate investments can be a more effective strategy for building wealth than trapping large amounts of equity in a single property. Real estate is an investment that is easily leveraged while tax advantaged at the same time. A home purchase is a major undertaking and is a perfect time to consider your total financial picture with an eye on long-term strategies. Most people fail to consider the “opportunity cost” of missed investments when planning a home purchase.

Paying Points: Loan origination fees or discount fees are “points”. One point is one percent of the loan amount. Points are a form of prepaid interest and are tax deductible in full in the year of the home purchase. Therefore, a point does not cost as much as it appears, after taxes. Each point paid up-front will decrease the rate on the mortgage by about .25% to .5% depending on the loan program. Over time, the lower rate will recover the cost of the points and yield benefits into the future. The key is in knowing what the break-even point will be. Points that pay for themselves before you replace either the loan, by refinance, or the home are a bargain especially after the tax advantages are considered. Lower points mean higher rates and vice-versa; its merely mathematics. Some hints on how to enhance the points experience:
  1. Have the loan officer substitute “points” for some of the itemized closing costs which are not tax deductible.
  2. Negotiate with the seller to pay some or all of your closing costs by building it into the price. Points are tax deductible to the buyer regardless of who pays them and is a cost of sale for the seller and not taxable. Use the cash savings for a bigger down payment, or for investing, or for the new things you will want for the home (instead of using credit cards). This strategy works extremely well for putting cash to a better use.
Beware: Money is a commodity whose price can be tracked like any other commodity. For instance, go to the Freddie Mac website, or to to see the nationwide average for fixed rates. Some lenders have ways to manipulate their quotes. For instance, they only consider the “discount” as points and not the origination fee as points when quoting, or labeling fees that are not reflected in the APR calculation. A price that seems too good to be true, may not be. Ask for a written lock guarantee.

Ed Hlavac