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What Is Tax Form 1098?

 

What Is Tax Form 1098?

Elizabeth Rosen
by Elizabeth Rosen, Contributor

Tax Form 1098, the Mortgage Interest Statement, is used to report mortgage interest of $600 or more. Additionally, this tax form can be used to report premiums paid for mortgage insurance in excess of $600.

Here is some information about the items that you will encounter on the 1098 Form:

Home Equity Loan

A Home Equity Loan (HEL) is best suited for homeowners who know the amount of cash they need and when they will need it. With this type of loan, the mortgage lender provides a specified sum of money (based on your level of home equity) which must be repaid over a certain period of time, usually with a fixed interest rate. Because a home equity loan is a debt secured by your home, it’s important to understand that defaulting on an HEL could result in foreclosure proceedings.

Home Equity Line of Credit

A Home Equity Line of Credit (HELOC) is a form of revolving debt. With an HELOC, the homeowner gets a line of credit (based on their level of home equity) which they can tap as needed. HELOCs typically come with fluctuating interest rates that adjust with the U.S. Prime Rate. Like an HEL, a Home Equity Line of Credit is secured by your home.

Mortgage Points

Mortgage points are used to lower the mortgage rate. While mortgage rates are expressed as annual percentages and recurring fees, mortgage points are paid only once, up front. A mortgage point is expressed as a dollar amount. However, that dollar amount is equal to 1% of the loan amount.

  • For a $200,000 loan, one mortgage point would cost $2,000.

Each mortgage point lowers the interest rate by ? or ¼ of one point.

  • If you wanted to lower your 5.0% interest rate by ½ of a mortgage point (to 4.5%) on that same $200,000 loan, and your bank lowered the rate by ¼ for each point, it would take $4,000 (paid up-front) to get a 4.5% mortgage rate.

Mortgage Interest

The mortgage rate is the interest that you pay in order to borrow money. It is expressed as a percentage of your loan amount, and as an annual rate. This is a simple example that offers a look at how interest works:

  • If you are borrowing $200,000, and your interest rate is 5.0%, it means that you pay $10,000 a year in interest. However, as your loan balance decreases, so does your interest fee. The next year, your loan balance might be $150,000 ? a 5.0% interest rate on that amount would be $7,500.

Mortgage rates play a major role in the affordability of loans. Depending on the type of mortgage you obtain, it may or may not have fluctuating rates.

  • A fixed-rate mortgage will have a steady interest rate throughout the life of the loan.
  • An adjustable-rate mortgage (ARM) will have interest rates that change after a specified period of time, based on the current housing market and national mortgage rates.

If your mortgage rate is adjustable, it will be “adjusted” based on a major mortgage index (e.g., LIBOR, COFI, CMT, etc.). If the index’s value rises, your mortgage rate and monthly payments will increase as well.

In the end, the interest rate of your mortgage will determine the total amount you are paying for the loan.

Mortgage Insurance

Mortgage insurance protects the lender in case you fail to make the mortgage payments. In general, if your down payment is less than 20% of the home’s purchase price, you will be required to purchase mortgage insurance. Mortgage insurance usually costs around 0.5%-1% of the total loan amount, which is added to your monthly mortgage payments for the year. A mortgage loan may be insured through the government or through the private sector (i.e., private mortgage insurance, or PMI).