Home mortgage rates are at their lowest levels in almost thirty years. It is a great time to buy an old house, but for those of our readers who wish to stay put it is also a great time to refinance. With mortgage rates far lower than those on credit cards or personal lines of credit, many homeowners are considering paying off existing obligations with a refinanced first mortgage. Before you make this move however, there are a few points to be considered.
1. The interest you pay on the new mortgage loan will be totally deductible from your federal income tax only if:
a.) the new loan is equal to or less than the old mortgage (unless you plan to use any excess for home improvements),
b.) when you obtained your old mortgage the funds were used exclusively to acquire and improve your principal residence, and
c.) the new loan is not in excess of $1,000,000.
2. If you borrow more than the face value of your old mortgage and use the funds for any purpose other than improving your house, e.g. to retire credit card debt or buy a new car, the interest on that portion of the new debt is subject to home equity loan rules. The interest on the first $100,000 of home equity debt is deductible in most cases as home mortgage interest.
3. Points paid on refinancing for the express purpose of improving your home are currently deductible if you pay them in cash at the closing. Points paid when you are simply refinancing the first mortgage but making no improvements are deductible over the life of the loan only.
As an illustration, suppose John and Mary Jones had a thirty-year fixed rate mortgage balance of $250,000 on their Queen Anne in Newton. They decide to refinance at a lower rate and for a shorter 15-year term and borrow an extra $25,000 to purchase a new car. For their new loan of $275,000 the Joneses pay one point ($2,750). The interest on the first $250,000 of the new loan is clearly deductible as home mortgage interest. The interest on the additional $25,000 is also deductible, as it falls within the $100,000 home-equity debt rules. The points of $2,750 must, however, be deducted over the life of the refinanced 15 year loan, and not all in the current tax year.
This is an overview. Any questions about your specific tax situation should be referred to your tax advisor.
American Landmarks
One Mount Vernon Street, P.O. Box 1050, Winchester, MA
01890 (781) 729-5174