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.
Mortgage Loans Online always suggests consulting with a tax professional to determine the applicability of any tax deduction to a borrower's individual circumstance.
