Refinance Home Mortgage Guide

Did you refinance your mortgage loan last year? If so, don’t forget to deduct any points you prepaid for interest on your 2005 tax return. The points you pay are pre-paid interest; you pay up front to receive a lower interest rate. The good news for you is these points are a deduction on your tax return.

If you refinanced your mortgage last year you may have to deduct the points you paid over the life of the mortgage. This means for last year your deduction will be a percentage of the total amount you paid for points in 2005. The percentage you are eligible for is the total amount you paid in points divided by the term of the loan. (the term length is in number of months)

There is a way around this. If you refinanced twice in 2005 the full amount of your points is your deduction. Also, if you are cashing out for renovations or improvements your points are fully deductible.

The interest you pay on your Home Equity Loan may be tax deductible. If you are legally responsible for the mortgage and the loan is secured by your home this interest can be an itemized deduction for you.

There are three requirements to claim the mortgage interest deduction. The first requirement is that you (the person claiming the deduction) are legally responsible for the mortgage and the payments. The home equity loan you have must be secured by your home. This home must be your primary home or a second property you own. You are not allowed to rent this home out or use it for your business. Lastly, you must itemize this interest as a deduction on your IRS form 1040.

For the most part you will be able to deduct the full amount of the interest you paid on the loan. There are limits however; if your home equity loan was used to renovate your home then you can deduct up to one million dollars in interest. If you used the money for any other purpose, your interest deduction is limited to one hundred thousand dollars per year.

There are exceptions to IRS rules for military personnel and members of the clergy. If you refinanced your home last year and were charged a penalty for early repayment the penalty you paid is also tax deductible.

Today President Bush gave up on the notion of changing the tax laws to eliminate your mortgage interest tax deduction. At a conference in Florida today a homeowner asked the President to ensure housing would remain affordable in the United States.

The President stated the mortgage interest tax deduction would remain as part of the tax code. President Bush had appointed a panel last year that recommended doing away with the mortgage interest tax deduction as we know it. President Bush has stated the tax laws are currently a mess and the Treasury Department is currently reviewing the changes suggested by the President’s panel.

The White House is holding off on their tax initiatives to concentrate on waging other battles. Some members of Congress feel that changing the tax laws to eliminate the mortgage interest deduction is too controversial. Tax laws are never a popular topic to address during an election year.

For now, homeowners rejoice; the mortgage interest tax deduction is safe.

As a homeowner paying interest on a mortgage you are eligible to deduct the interest you pay each year from your Federal income taxes. In order to get the maximum mortgage interest tax deduction you need to understand the rules.

Mortgage interest that you pay on your primary and secondary home is generally deductible. Mortgage interest is any amount you pay as interest on a loan for your primary or secondary home. Eligible loans include:

The mortgage you used to purchase your primary home.

Any second Mortgage you have on your home.

Your Home equity loans or equity lines of credit.

The most important factor is that the loan has to be secured by your home. If the loan is not secured by your home it is not eligible for the mortgage interest deduction.

For IRS purposes, your home can be a house, condo, coop, boat, mobile home, RV, or anything that has sleeping area, cooking area, and a toilet. The deduction only applies to your primary residence and second home. You can not deduct interest from any properties after you second home. You are eligible to claim the deduction as long as the loan is your legal responsibility, and you make the monthly payments.

There are limits to the amount of interest you can deduct. You cannot deduct more than the value of your home. Additionally, the deduction is limited to one million dollars. Home equity loans are limited to $100,000. For more information on the limits for interest deductions refer to IRS publication 936.

To claim the deduction on your taxes you will need the form 1098 from your mortgage lender. This form outlines the interest as well as any points you paid the previous year. If you recently closed or refinanced your mortgage you will need the closing statement. You may also need the name, address, and SSN of the seller you purchased from.