Getting a mortgage in 2021? Take these 3 steps
Just as 2020 was a great time to get a mortgage, so too is 2021 shaping up to be a good year to apply for a home loan. Mortgage rates are at record lows, so locking in a home loan means more affordable monthly payments and major savings on interest. But once that new loan is in place, it's important that you take these key steps.
1. Work your new payments into your budget
Ideally, you should already be following a budget to track your spending. And once you have a mortgage, you'll need to rework your budget to account for your monthly payment, as it's probably different than what you were paying for housing before.
For example, if you were renting up until now, your mortgage payment may be higher than your former rent was. Even if it's not, when you factor in outside expenses like property taxes and insurance, you may spend more on housing all in. Keep in mind that in some cases, you'll pay your property taxes and homeowners insurance costs as part of your monthly mortgage payment. Sometimes, you won't, and you'll need to account for all expenses either way.
2. See if you can afford to make extra payments
The sooner you're able to pay off your mortgage, the less money you'll spend on interest over the life of your home loan. Once you've incorporated your monthly mortgage payments into your budget, it pays to see if you have the wiggle room to pay extra into your home loan. You can do so in a number of ways -- either through additional lump-sum payments every few months or paying slightly more on a monthly basis.
That said, paying down your mortgage early shouldn't necessarily supersede other important goals, like paying down unhealthy credit card debt or saving for retirement. Right now, mortgage rates are extremely low. Paying off your loan early will save you money. But it's also not the worst thing to carry a 30-year mortgage for the full term at a rate of under 3%, which is what you're likely to qualify for if you have good credit.
3. See if it pays to deduct mortgage interest on your taxes
There are certain tax breaks available to homeowners that renters can't capitalize on, and one big one is the mortgage interest deduction. This holds especially true during the early stages of a mortgage, when more of your monthly payments go toward your loan's interest than its principal.
If you signed your mortgage recently, you can deduct interest on a loan with a principal of up to $750,000. For those whose mortgages were signed prior to Dec. 15, 2017, that threshold is $1 million. And that could save you a lot of money on your taxes.
That said, to deduct mortgage interest on your taxes, you'll need to itemize on your return rather than take the standard deduction. In 2021, the standard deduction is $12,550 if you're single and $25,100 if you're married filing jointly.
In addition to deducting your mortgage interest, you're allowed to deduct up to $10,000 in state and local taxes (including property taxes) combined. You can also deduct medical expenses that exceed a certain portion of your income, and charitable donations. But if you've managed to snag a low interest rate on your mortgage and didn't take out a particularly large loan, you may be better off claiming the standard deduction. Ultimately, you'll need to run the numbers to see what makes the most sense for you.
A new mortgage could mean big changes for your finances. Once that loan is in place, be sure to take the above steps to best manage it and eke out any benefits it brings you.
Ready to get started? Connect with a First Midwest Lender today.