How a Primary Residence Can Impact MortgageOctober 2, 2018
Did you know home buyers can usually qualify for better mortgage rates when they are requesting money to purchase their primary residence? This is possible because the mortgage lenders are taking on less of a risk than they would when financing a second mortgage. Other than your mortgage, a primary residence can also have positive impacts on your annual taxes and capital gains taxes. Below, we delve into how a primary residence can impact your mortgage and taxes.
Primary Residence Defined
In basic terms, a primary residence is the place you call home; it’s your house or apartment that you inhabit for a majority of the year. The address of your primary residence will appear on your driver’s license, voter registration card, automobile registration, and other important documents. So if you own more than one property, your primary residence will be the home that you spend more time in.
Implications on Annual Taxes
A few items on your primary residence, such as your mortgage interest, are tax-deductible. Loans up to $750,000 (combined for both your primary home and secondary home) are eligible for a mortgage interest tax deduction.
Additionally, as of 2006, you can now claim your mortgage insurance payments as part of the mortgage interest and have them deducted from your taxes. In general, you will be able to deduct more money in mortgage interest than the amount of money you would get from claiming the standard deduction.
Implications on Capital Gains Taxes
You will be taxed at the long-term capital gains rate when you sell a home that you’ve had for over a year. If you have a high annual income, your capital gains tax rate will be higher.
Furthermore, the Primary Residence Exclusion could allow you to receive a capital gains tax cut. However, you will only be eligible for this exclusion pending you have owned your primary residence for at least two years.
How a Primary Residence Can Impact Mortgage
In addition to receiving better mortgage rates, purchasing a primary residence makes qualifying for a home loan easier. For primary homes, mortgage lenders don’t require as large of down payments as they normally would for second homes. There are also many first-time home buyer programs that are exclusive to those who are purchasing a primary home. To illustrate, the Federal Housing Administration and the Department of Veterans Affairs will only grant FHA and VA loans to people purchasing a primary residence.
There is one critical condition you should be aware of before declaring your home as a primary residence. If you plan on renting out your home, it cannot be named your primary residence. Doing this would be recognized as mortgage fraud, which would result in your loan getting declined and the loss of any money you’ve already spent throughout the mortgage process.
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