First-time buyers often feel overwhelmed.

Buying your first home can be an exciting time. Despite this excitement, most first-time buyers don’t know what hot to navigate this process on their own, especially when it comes to tax implications.

To prevent your first- time buying experience from turning sour, we’ve outlined some of the most vital tax implications you will need to know before putting in an offer.

Mortgage Terms

One of the most important pieces of tax information you should know before buying a home is the mortgage. A mortgage is essentially a loan that depends on the property and personal preference of the buyer.

The term of the mortgage details the length of time that the agreement is valid. Lenders typically offer terms that range from six months to ten years, with the majority of buyers preferring a 5-year term.

The term is important because it will dictate the monthly payment you’ll have. Meaning, you’ll need to decide if you’ll want a fixed-rate or variable-rate mortgage.

A fixed-rate mortgage will stay the same during the duration of the term (and can’t be renegotiated without a penalty until the term reaches its expiry).

Whereas, a variable rate mortgage can change based on market conditions which will allow it to go down or up over the term.

Interest Rates and Deductions

Another tax factor that first-time buyers should be aware of interest rates and deductions. It’s important to note that interest rates are expected to rise, which means that homeowners may need to pay more on their mortgages in a given year.

To help offset these rising costs, it’s important that first time home buyers look into potential deductions they are eligible for. Oftentimes, first-time buyers are eligible to claim up to $5,000 by receiving a First-Time Homebuyers Tax Credit.

Plus, there are other credits for moving expenses (if you need to move for work or education), accessibility credits and more. To ensure you are eligible to claim these credits its best to speak with a professional to assess your situation and ensure your state offers them.

State Programs

There are also a number of state programs that provide first-time buyers assistance. For example, Illinois, Ohio, and Washington all offer down payment assistance for those who qualify. To qualify, these programs are often based on income and may have a limit on how expensive the property can be.

However, for those who do qualify, they may be able to receive assistance with the down payment, closing costs and costs to improve a property upon closing.

Traditional or Roth IRA Withdrawals

Every first-time home buyer is eligible to take out $10,000 from a traditional or Roth IRA to put towards the purchase of a home, without having to pay the 10% penalty for early withdrawal. It’s important to note that the federal government’s definition of a first-time homebuyer is someone who hasn’t owned a personal residence in three years.

Meaning, even if you owned a home in the past, you may still be eligible to take out this money without the penalty added.

However, if you have a traditional IRA you will have to pay income tax on the money you withdraw. Whereas Roth IRA accounts will not be subject to additional taxes.

Buying a home for the first time can seem like a daunting experience. However, with the right preparation and information, you can feel prepared when putting in an offer. If you’d like more information on this subject, get in touch with a member of our team who would be happy to help.

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