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Community Corner

Paying Mortgage Interest Does Have Benefits Come Tax Time

Tax deductions from interest paid on a mortgage may soften the shock of seeing how much you actually pay in interest over the life of the loan.

With the tax incentives of 2010 extinct, there is still a major incentive in the mortgage income tax credit.

At almost every real estate closing I attend, there is an explanation of the total cost of credit which appears on the Truth in Lending Disclosure. This outlines the total amount which will be paid to the bank over the course of the mortgage (typically a 30 year mortgage).

To illustrate this, the costs of a 30-year, $300,000 mortgage with a fixed  interest rate of 4.875 percent would cost approximately $580,000 over the 30-year term.

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Staring at that enormous number usually evokes a reaction–a slight gasp or maybe a chuckle. Think about it. When you add up 360 mortgage payments and look at it in the eye, it's a big nut. During the life of the loan, borrowers pay far more in interest they do in principal–right now it’s usually, double, but when interest rates are higher, they can be three times as much! Because of the way loans are structured, in the first years the monthly payment is comprised almost entirely of interest. In the final years, the payment is comprised of mostly principal.

With tax season heavily upon us this week I took special note while sitting at a real estate closing. The buyer’s attorney coupled the total cost of credit explanation with,” yes, but remember, the goverment ends up paying about a third of that through income tax credits.” What a wonderful incentive. It’s the biggest deduction that many people get to take. Usually, when mentioned, this mortgage income tax credit is spoken of on a smaller annual scale when we file our taxes, but should evoke the same reaction when multiplied by 360. That's a big number too. It means we are actually only paying 2/3 of our mortgage in the first years.

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If a home is available to rent for $2000 per month vs. buying a home which costs $2000 per month, the yearly savings of owning are much greater when you figure in this tax credit. Not to mention you can modify the house however you choose, don’t have to deal with a landlord and usually obtain a sense of pride that comes along with homeownership.

So while there are a number of experts out there touting that this is an ideal time to buy, at tax time it becomes increasingly obvious that in most instances it seems to make a lot of financial sense.

Note: When it comes to tax implications of home ownership you should always contact a professional accountant.

Amanda Eckart is a licensed Sales Person with Realty Connect USA and Port Jefferson resident. She has over 12 years of experience assisting home buyers and sellers. She can be reached at 631-404-2215  or by email at aeckart@realtyconnectusa.com. Also on the web www.thedownport.com

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