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With mortgage rates at a 40 year low, many of our past, present, and potential new clients are looking to refinance their mortgages. Either to reduce their monthly payment, shorten their loan term, consolidate debt, make home improvements, or pull cash out for college. The reasons are numerous.
Here is a list of the most commonly asked questions regarding how refinancing may affect savings from a tax angle. Although this information is considered valid advice, consult your tax accountant on your specific situation and any new changes to the tax code.
Q) Are all points upfront deductions when I refinance?
A) No. In a refinance the points are deductible over the life of the loan
Ex. If you paid 1,000 in points and you refinanced on a 30 year fixed loan you would deduct $33.33 per year. In a purchase transaction, the points are deductible up front.
Q) What if I refinanced for a second or third time?
A) You would be able to accelerate the outstanding balance in points from the previous transaction, Resulting in the balance becoming deductible in full. If you sold your home after refinancing, the points would also be accelerated.
Q) What if I refinanced a second home or investment home?
A) Points are deductible over the loan term just as if you refinanced your primary residence.
Q) What if I used proceeds from my refinance to fix up my home?
A) If some of the refinanced funds are used to make renovations to your primary home, a portion of the points is deductible up front. This is based on the percentage of the "Refinanced Funds" used for improvements. (Consult your tax advisor)
Q) If I just pull cash out, is the interest deductible?
A) When you pull $100,000 or less out of a refinance transaction, that amount is treated as home equity debt on which the interest is fully deductible, assuming you do not have any other home equity loans outstanding.
Ex. You could purchase a car and that interest would be deductible. This would also apply to pulling cash out for a business, or to purchase stocks. When a loan balance is greater than $100,000, the general rule is the interest in-excess of $100,000 is not tax deductible. (Consult your tax advisor)
One last thing to remember!
Many of us have refinanced and lowered our monthly payments due to the lower interest rates.
This may cause an unexpected tax increase at the end of the year!
For more information or to ask us to post a specific question, please email us at dhall@1stchoicellc.com
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