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Points or No Points? Buyer or Seller? The Intricacies of Mortgage Shopping

By Benny L. Kass
Saturday, January 15, 2005; Page F10

Third in a series of articles

Among the biggest tax benefits that the federal government gives homeowners are deductions for mortgage interest and points. Here's a closer look:

Mortgage interest. Interest on mortgage loans on a first or second home is fully deductible, subject to these limitations: acquisition loans up to $1 million, and home equity loans up to $100,000. If you are married, but file separately, the limits are split in half.

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An acquisition loan is one that is used to buy, construct or substantially improve your home. If you refinance for more than the outstanding debt, the excess amount does not qualify as an acquisition loan unless you use all the excess to improve your home.

For example, say that several years ago you bought your house for $200,000 and obtained a mortgage (or deed of trust) for $150,000. Over time, you have reduced your mortgage debt to $125,000, while the value of your house has increased to $400,000.

Because rates were low last year, you refinanced, taking out a mortgage for $210,000. Your acquisition indebtedness, however, remains $125,000. The additional $85,000 that you took out of your equity does not qualify as acquisition indebtedness, but because it is less than $100,000, it qualifies as a home equity loan and it is deductible.

However, if you borrowed $250,000, you would have $125,000 of acquisition indebtedness and $125,000 of other debt. Only the first $100,000 of that $125,000 would be deductible; the rest would be treated as nondeductible personal debt.

The IRS has made it clear that you do not have to take out a separate home equity loan to qualify for this aspect of the tax deduction.

Points. When you shop for a mortgage, you will get a lot of information. One of the important concepts you should understand is that of "points."

Points can go by different names, such as loan discounts or origination fees. Regardless of what they are called, they represent money that you, the borrower, must pay. The payment is usually upfront, in cash, because it generally is not included in the loan amount.

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