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When you take out a mortgage to finance the purchase of a home, you will
have to make monthly payments. Your house payments may include several costs
of owning a home. For tax purposes, generally the only costs that are tax
deductible are real estate taxes (property tax) actually paid to the taxing
authority and interest that qualifies as home mortgage interest. (However,
in the first year of your home loan, depending on whether you obtain a
purchase or refinance loan, certain other costs and fees may be tax
deductible such as loan origination fees or points. Consult your tax advisor
for further details).
Interest is one of the four components of a monthly home loan payment. The
other three are principal, taxes and insurance. These four are commonly
referred to as PITI. Principal is the total sum of the money you borrowed,
and in a fully amortized repayment program, a portion of each monthly loan
payment is applied to reduce the principal balance owed. Interest is the fee
charged for borrowing money. Taxes and insurance refer to the monthly cost
of property taxes and homeowners insurance. These amounts may or may not be
included in your loan payment.
Home ownership is a common method used for lowering your tax liability. Each
year you will receive Form 1098 Mortgage Interest Statement from your home
loan lender that will indicate the amount of interest you paid for the year.
The annual interest you pay to your home loan lender is deducted from your
gross income, just like other tax deductions, in order to determine your
taxable income. By refinancing and taking cash out, you may decrease your
tax liability or even possibly create a tax refund due to you.
Home123 always suggests consulting with a tax professional to determine the
applicability of any tax deduction to a borrower's individual circumstance.
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