FHA closing costs can add up, despite the fact that they are lower than many other programs. Once you cough up the money at the closing, you might feel like your wallet is a little emptier. The good news is you may be able to deduct several of the costs on your taxes. Whether you take out a purchase or refinance FHA loan, you can write off the same costs.
What FHA Closing Costs Can you Write Off?
Now comes the big question. Of all of the closing costs you pay, which ones can you write off? It’s not a big list. But, the good news is one of the costs that you can write off is usually the most expensive. We’ll start with that one.
You can write off the points you pay on the loan. Points are calculated as a percentage of your loan amount. For example, if you pay 2 points, you pay 2% of your loan. On a $200,000 loan, that means $4,000. Now, there can be two different types of points:
- Origination points – Lenders charge these for various reasons. High LTVs, high debt ratios, and low credit scores are a few of the reasons. Sometimes, lender charge points because the file requires a lot of work. It helps the lender cover their overhead.
- Discount points – Lenders charge these points when you want to lower your interest rate. Let’s say the lender offers you a 5% rate, but you want a 4.5% rate. In order to obtain that rate, you may have to pay 1 point to the lender. It’s like prepaying the interest to the lender. They still make money and you get a lower payment.
If you itemize your deductions on your tax return, you can write off the points, whether origination or discount points.
The two other fees you can write off include:
- Real estate taxes – Sometimes at the closing you have to pay real estate taxes up front. If the taxes are due and payable before your escrow account is established, this may be the case. You may also owe the seller money because he already prepaid the taxes for the year. If you refinance, you may have to bring your taxes current. In any case, the portion of the taxes that you are responsible for can be deducted on your tax return.
- Interest – You may pay interest from your closing date to the end of the month. You’ll pay a per diem rate. The lender multiplies that rate by the number of days you’ll have the loan before the end of the month. Because you pay interest one month in arrears, this is necessary. For example, if you close October 20th, your first payment isn’t due until December 1st. You’ll owe interest from October 20th – October 31st. Your mortgage payment on December 1st will cover the interest from November 1st – November 30th.
Again, you must itemize your deductions on your tax returns in order to write off these FHA closing costs.
In order to take advantage of these deductions, you’ll need your Settlement Statement from the closing. If you provide your tax advisor with this document, he can write off your FHA closing costs for you. This can help lower your tax liability and offset some of the costs you paid when you took out your FHA loan.