Although the cost of home ownership has fallen considerably in recent years, it remains quite high by historical standards. However, rents remain even higher and show no signs of falling in the near future. As such, more and more Americans are choosing to purchase affordable starter homes near their places of employment. Many of these folks are struggling to recover from a crippling recession that gutted their savings accounts and reduced their wages. House payments that once would have been easily affordable have become increasingly difficult to manage in the face of this hard-nosed economic reality.
Fortunately, the U.S. government offers a sizable tax break for anyone who uses a mortgage to finance the purchase of a home. Known as the Mortgage Interest Tax Deduction, it's a well-regarded income tax deduction that has helped millions of Americans afford generously-sized homes. Although it's in danger of being phased out thanks to an ongoing battle among lawmakers over taxes and spending, it will remain in force for the next several years. If you've recently purchased a house and aren't sure of how to take advantage of this money-saving tax deduction, you'll need to keep a few things in mind.
First, you can only deduct your mortgage's accrued interest from your year-end taxable income figure. If the interest rate on your mortgage was 5 percent, you can only deduct 5 percent of the total principal-plus-interest amount that you paid to your mortgage lender. The total amount of interest that you're eligible to claim will depend upon the size of your mortgage.
You may also deduct certain insurance payments that you make directly to your mortgage lender. Unfortunately, this doesn't include any of the homeowner's insurance payments that lenders sometimes collect and store in escrow for their customers. Rather, you may only deduct the total value of the mortgage insurance payments that you've made over the course of the year. Your mortgage insurance policy exists to protect your lender's revenue stream in the event that you become temporarily unable to make your regularly-scheduled payments.
Many mortgage lenders also collect property taxes from their customers. If your lender engages in this practice, you may deduct the total value of the property taxes that have been assessed on your property over the course of the tax year. If you live in a high-cost area, you may be subject to an IRS-imposed deduction cap. You should speak with your tax professional before claiming this deduction.