The new year has brought changes for homeowners and homebuyers alike. Higher mortgage limits for conforming loans, thanks to Fannie Mae and Freddie Mac, mean homebuyers have more leeway when it comes to shopping for a house.
Meanwhile, baby boomers are gearing up for home makeovers, according to one study — and equity can be one way to foot the bill while saving big on interest. The new tax code changes are also something to note, especially for higher-income homeowners in high-tax states.
Here are a few tips that can help you this month:
Take advantage of higher FHA loan limits
Homebuyers who want to lock in low mortgage interest rates but don’t have a big down payment saved or an excellent credit score can find help through FHA mortgages.
FHA loans, which are backed by the Federal Housing Administration (FHA), only require a 3.5 percent down payment for borrowers with credit scores of 580 or higher; if your score is lower than 580 you would need a 10 percent down payment to qualify for an FHA mortgage.
The good news for today’s FHA borrowers is that roughly 3,000 zip codes got a 7-percent hike in FHA loan limits this year. Now homebuyers can borrow up to $314,827, an increase from last year’s $294,515. In more costly areas, loan limits rose to $726,525 from $679,650. These higher limits offer buyers access to a bigger piece of the market, especially as home prices continue to climb upwards.
FHA loans can be a good first step for new homebuyers. There’s always the option to refinance down the road, as they build equity, into a conventional mortgage, which will eliminate the PMI requirement.
To find out more about FHA loans, go here.
Equity can help boomers pay for renovations
Most baby boomers not only plan to stay in their homes, but they also plan on remodeling them, according to a recent survey by Chase and Pulsenomics. The majority of respondents, 9 out of 10, said they want to make improvements on their home, with bathroom renovations topping the list of remodeling projects.
Boomers also said they plan on starting home renovation projects within the next three years. The big question is: what’s the best way to fund these big-ticket projects? One option is to borrow against the equity in your home and save on interest.
Today’s credit card interest rates hover around 18 percent, making them about three times as expensive as a home equity loan, which has a 6 percent interest rate. Home equity lines of credit, or HELOCs, up to $30,000, currently have an estimated 7 percent interest rate. Both types of equity loans are far less expensive than using credit cards.
Homeowners who plan to age in place might do better financially by tapping home equity, provided they have a stable source of income. The downside of using home equity is that, if you fail to pay the loan, you could lose your house.
Be sure to talk to your financial advisor before you decide.
Most homeowners can skip claiming mortgage interest to save time and money
This tax season homeowners will have to make a choice: to take the standard deduction — which almost doubled in 2018 — or itemize their taxes and claim costs associated with homeownership, such as mortgage interest.
Many homeowners will likely find the best option is to save time itemizing deductions and take the standard deduction. In 2018, the standard deduction almost doubled per the Tax Cuts and Jobs Act of 2017, or TCJA. The current deduction for singles is $12,000, up from $6,350 in 2017, and $24,000 for married couples filing jointly.
|Married Filing Jointly (MFJ)||$12,700||$24,000|
|Elederly or blind (single, no surviving spouse)||Additional $1,550||Additional $1,600|
|Elderly (MFJ and both over 65)||Additional $2,500||Additional $2,600|
|Personal exemption||$4,050 per family member||Eliminated|
This affects homebuyers because there’s less incentive to deduct mortgage interest, PMI interest and property taxes this year than in years past. The sizable raise in the standard deduction ceiling will work in most taxpayers’ favor and also save them time in itemizing deductions.
High-income homeowners living in heavily taxed states will likely be most affected by the tax code change, particularly in the revisions to the state and local tax deductions, known as SALT, according to Carmen Alvarez, CPA and owner of The Alvarez CPA Group in Tampa, Florida.
The TCJA capped SALT deductions at $10,000, which includes both property tax and either state tax or sales tax. Before TCJA, there was no limit on SALT deductions, which benefited people with large mortgages and high-priced tax bills. According to a report by the Tax Policy Center, about 9 percent of households will be affected by the change.
“My best guess is that wealthier people are going to see this cut into their deductions,” Alvarez says. “That’s why so many people paid two years of real estate taxes at the end of 2017, so they could get one more year where this real estate tax wasn’t capped at $10,000.”
Talk with your accountant before you spend too much time itemizing your deductions. Although mortgage interest and PMI can be a big part of your home expenses, they still might not outweigh what you can get from the standard deduction.
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