Recently, the U.S. Congress passed the largest tax reform bill since President Reagan's time. The new bill adjusts the mortgage interest deduction policy, lowering the cap from 1millionto750,000. This means that for homes with a mortgage of $750,000 or less, the interest paid can still be deducted from taxes. However, for loans exceeding this amount, the tax deduction benefit is no longer available.
For the vast majority of homebuyers, this change is unlikely to make a significant impact. According to the National Association of Realtors, in October 2017, the median price of existing homes was 246,000,and the average price was 287,000. Meanwhile, data from the U.S. Census Bureau revealed that the median price of new homes in the same month was 312,800,with an average price of 400,200. Both figures are well below the $750,000 deduction cap.
But for those in the market for high-priced properties, the new mortgage interest deduction rules are clearly less favorable. With no tax deduction for interest on loans over $750,000, the cost of purchasing a luxury home just went up.
In the United States, home loans primarily come in two flavors: the most common is the fixed-rate mortgage, followed by the hybrid loan that combines fixed and adjustable rates. A fixed-rate mortgage ensures that the interest rate remains constant regardless of the loan term, shielding borrowers from market fluctuations. Conversely, an adjustable-rate mortgage (ARM) floats with market conditions. When it comes to loan terms, 30-year, 15-year, 7-year, and 5-year mortgages are the most popular options. Let's dive into these options to see what they're all about.
30-Year Fixed-Rate Mortgage: This is the go-to choice for most homebuyers. Due to its long term, the interest rate is relatively higher, but the monthly principal payment is lower, making it easier to manage. However, over the long haul, the total interest paid is significantly more than shorter-term loans. According to Freddie Mac's weekly report on national average mortgage rates, as of December 21st, the 30-year fixed rate averaged 3.94%. Rates vary among banks, ranging from a low of 3.74% to a high of 4.375%, with most hovering around 3.875%. For a 500,000 loan at 3.8752,351, and the total repayment over 30 years amounts to about 840,000,with340,000 going to interest and $500,000 to principal.
15-Year Fixed-Rate Mortgage: Currently, the 15-year fixed rate stands at 3.38%, with lows dipping to 3.115% and highs reaching 4%. Since the loan term is half that of a 30-year mortgage, the interest rate is lower, but the monthly principal payment jumps significantly. However, the total repayment is much less than a 30-year loan. For a 500,000 loan at 3.253,513, nearly half more than the 30-year loan's 2,351.But the total re payment is only about 630,000, with 130,000 in interest—just over a third of the 30−year loan′s340,000 in interest, saving a whopping $210,000. Hence, if finances permit, many opt for the 15-year fixed-rate mortgage.
5/1 and 7/1 ARM Loans: These loans offer a fixed interest rate for the first 5 or 7 years within a 30-year term, then switch to an adjustable rate. The upside is that the fixed period is short, resulting in a lower interest rate and lower monthly payments during this phase. The downside is that after the fixed period, the rate floats with market conditions. If market rates rise, so will your mortgage rate, increasing your monthly payment. Conversely, if market rates fall, your monthly interest payment will decrease. Currently, the fixed rate for a 5/1 ARM is 3.39%. For a 500,000 loan at this rate,the monthly payment would be about 2,215 during the first 5 years, 136 less than the 30−year fixed−rate mortgage′s2,351. But the monthly payment after 5 years is a wildcard, dependent on the market rate at that time.
According to statistics, the average mortgage amount approved for homebuyers stands at a compelling 244,000.Currently,a staggering 65137,000. Across the nation, the total mortgage debt amounts to an astonishing $9.9 trillion.