Are my mortgage closing costs tax deductible?

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Mortgage closing costs can be expensive, but these five in particular could be tax deductible.

As a first-time home buyer, you might be surprised at the high price of real estate. In addition to buying a home itself, homeowners should plan to pay closing costs, which typically cost between 3% and 6% of the total loan amount.

For context, this means that if the purchase price for your home is $ 250,000, you could be paying up to $ 15,000 in estimated closing costs. So it makes sense to try and save money whenever possible. And at some point you might have wondered if your closing costs were tax deductible.

Underwriting fees, registration fees, appraisal fees, attorney fees, research fees, and even credit file fees are all examples of fees you pay when you close your home. Additionally, seller’s concessions are closing costs paid by the seller of the home you are buying.

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When it comes to mortgage write-offs, homeowners can take advantage of tax deductions on their property taxes and mortgage interest. However, you might be surprised to learn how much of your closing costs fall under this umbrella.

5 tax-deductible mortgage closing costs

The current standard deduction is $ 12,400 for singles and $ 24,800 for married couples, according to the Internal Revenue Service (IRS). So any tax deductions you receive on your closing costs will only be beneficial if they total more than the standard deduction.

Let’s take a look at five mortgage closing costs that are tax deductible for home buyers. And if you’re looking to explore your mortgage options, be sure to visit Credible to compare loan rates and mortgage lenders.

1. Loan origination fees and mortgage points

Mortgage points are all of the fees and charges you paid to buy the home. Points can include things like setup fees, discount points, and maximum loan fees.

The IRS considers mortgage points as prepaid interest, and they may be tax deductible if you itemize your deductions. However, mortgage points must meet the following conditions to be tax deductible:

  • You have used the mortgage points of your primary residence
  • Paying mortgage points is an established business practice in the area where you purchased the home
  • Points are within the normal range for this area
  • The total amount of points paid is shown on your payment statement

To learn more about your mortgage options, be sure to visit Credible to compare lenders and mortgage rates.

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2. Mortgage interest

Sometimes a portion of your mortgage interest is paid at closing, and those fees would be tax deductible. You can continue to deduct your mortgage interest payments each year as long as you own that home.

3. Property taxes

Your annual property taxes are tax deductible, so if you pay a portion of it at closing, you can deduct it from your annual taxes. However, the IRS places limits on the amount you can deduct from property tax per year. Married couples can deduct up to $ 10,000 per year in property taxes or $ 5,000 if you are married and file separately.

4. Mortgage insurance

If you’ve bought a home and forfeited a down payment or paid less than 20%, most lenders will require you to have private mortgage insurance (PMI). On average, the PMI costs between 0.5% and 1.5% of the total loan amount.

Whether or not the PMI is tax deductible really depends on the current tax year. For 2020, the PMI is considered tax deductible. But Congress regularly changes this, so it’s not clear whether PMI will be tax deductible in 2021.

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You can use this mortgage calculator to determine your rates and fees and how much you can expect to pay on your monthly payments.

5. Expenses related to goods in difficulty

And finally, if you’ve recently purchased a distressed property, some of your property maintenance or improvement expenses may be tax deductible. For example, if you have had to pay back taxes or repairs, these items may be tax deductible.

The bottom line

When you take out a home loan – whether it’s a USDA loan, VA loan, FHA mortgage, or whatever – paying closing costs is inevitable. But, you may be able to save some money during tax season. You can take advantage of tax deductions in the year they are paid or over the life of the loan.

If you need help determining which items are tax deductible, it’s a good idea to work with a financial advisor or CPA. And if you want to explore your loan cost options during the home buying process, you can speak to one of Credible’s mortgage experts.

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Have a finance-related question, but don’t know who to ask? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert column.

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