Hurry, Close on Home Loan
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Sunday, December 7, 2008
Weak housing prices are a seller's nightmare, but a boon for buyers able to scoop up a bargain. Although most expenses connected with buying a home are not deductible, there's a big exception when it comes to points paid to get a mortgage. Each point is 1 percent of the mortgage amount. So if you pay two points on a $200,000 mortgage, that's $4,000.
When the house you're buying is your principal residence, the entire expense is deductible in the year you pay it. And, get this: You're permitted to deduct the points even if you persuade the seller to pay them for you.
There's a different rule for points paid when refinancing a home loan. But closing the deal by year-end could still pay off. Points paid on refinancing are deducted over the life of the loan. That means you deduct one-thirtieth of the cost each year on a 30-year mortgage.
But if you use part of your new loan to improve your home, you may be entitled to a larger first-year deduction. Points relating to the portion of the loan used for home improvements may be fully deductible in the year you pay them. For example, say you refinance a mortgage with an outstanding balance of $80,000 with a lower-rate loan for $100,000. If you use the proceeds of the new mortgage to pay off the old loan and to pay for $20,000 of home improvements, you can deduct 20 percent of the points you pay on this year's return.
And if you're among the millions of serial refinancers -- homeowners who have refinanced more than once -- closing by Dec. 31 could buy you a big write-off.
Some homeowners, concerned about mortgage-market meltdown, are racing to trade their adjustable-rate mortgages for fixed-rate notes. When you refinance a loan that resulted from a previous refinancing, that ends the life of the first refinancing and means that all of the yet-undeducted points can be written off at once. (One exception to this: If you refinance with the same lender that holds your current loan, undeducted points on the loan you're refinancing are deducted over the life of the new loan.)
