Home Mortgage Refinancing Guide

Every homeowner knows the advantage of having a mortgage every year when April rolls around. As a homeowner you get to deduct the interest you paid the previous year on your mortgage loan.

What many homeowners don’t know is that they are eligible for another deduction if they paid points for refinancing or purchasing a new home. As a reader of this blog you know that a point is 1% of the loan amount paid at the time of closing. In exchange for paying this fee up front you get a lower interest rate. Take a close look at the 1098 you got from your mortgage lender. If you paid points last year they should be itemized on this document.

The 1098 you receive each year shows the amount of mortgage interest you paid the previous year. If you prepare your own tax return the interest paid and points go into line 10 of your Schedule A. If you paid points and they are not on your 1098 but you have them on your closing paperwork, the amount goes on line 12 of your Schedule A. Don’t overlook this deduction, it could save you money.

If last year was the first year of your mortgage pay close attention to points that were paid. The seller will often pay part or sometimes all of the points for you. Guess what? If the seller paid all the points, the buyer still gets to claim the deduction. Whether or not you get to deduct all of what you paid in points depends on the following factors.

The points must have been paid on your primary residence, where you live for most of the year. You must report the points in the year they were paid and claim the deduction for that year. You must be able to document on your settlement papers that the points were paid on the mortgage.

Points that are paid on an investment property or vacation home cannot be fully deducted the year you took out your mortgage.

Points paid when refinancing a mortgage may also be tax deductible. If the proceeds from the refinance are used for home improvements they may be fully tax deductible. If you used the money for other reasons such as purchasing a car, you must take the deduction over the term of your new loan.

To calculate the amount of deduction you are eligible for, divide the points you paid by the number of payments you will make over the loan?s term. Your lender will also be able to provide this information to you.

To learn more about maximizing the tax deduction for your mortgage interest payments, sign up for our free guide to mortgages and mortgage refinancing.

There is nothing surprising about the fact that President Bush is receiving strong criticism for his advisory panel recommending removal of the tax deduction for home mortgage interest. The President’s advisory panel is a nine-member board that is recommending the following in its report next week:

First, they recommend lowering the mortgage interest deduction cap; this is the amount of a mortgage for which individuals would receive a tax deduction for interest paid on the loan. Presently this cap is set at one million dollars. They will lower this to levels in line with regional housing prices. This is estimated to be between $172,000 and $312,000 depending on the area of the country.

Second, they want to change the deduction to a credit that equals roughly fifteen percent of what you paid in mortgage interest up to the cap. A tax deduction claimed will reduce the taxable income on your return; credits on the other hand, are a dollar for dollar deduction from the taxes you pay. This is being touted as a benefit to the proposed recommendations.

For the most part, the larger your home mortgage and the higher your income the more you have benefited from the previous interest deductions on your tax return. Under the tax credit you will see less of a benefit. For example, a person who owes $20,000 each year on a $350,000 mortgage loan that itemizes their tax return each year was able to reduce their taxable income by $20,000 each year. With the proposed system this person would only save approximately $3,000 each year opposed to nearly $5,000 under the old system.

This change may cause many homeowners to stop itemizing their tax returns completely, opting for the standard tax deduction along with the mortgage credit if they qualified. It may be some time before any of the panel’s recommendations are implemented. The last time the government overhauled the tax code was 1986; this was 10 process before the changes were implemented.

The mortgage interest deduction you claim on your taxes is under attack and has been since the days of the Reagan administration. This deduction allows homeowners to deduct the interest paid on their home mortgage loan from income tax. It also allows for the deduction of Property taxes on your home. There are many loopholes in this deduction that even cover things like boats and residential vehicles that function as homes.

This deduction is believed to cost the IRS nearly sixty three billion dollars in tax revenue every year. Lawmakers in Washington are greedy…especially the ones that come from Texas. This month the President’s Advisory Panel for Federal Tax Reform committed to eliminate the deduction if your mortgage is from $250,000 to $313,000. They also recommended eliminating the deduction for property taxes on your home.

Limiting the mortgage interest deduction would create much needed capital for the Treasury; the deficit has ballooned astronomically due the war, poor Medicare legislation, and natural disasters from Hurricanes in the Gulf. This recommendation would greatly hinder homeownership in America. It would mostly affect poorer Americans; this is par for the course of this President’s administration.

Another possible effect of this recommendation is a recession in the economy due to slowing of the housing and construction industry; which subsequently have been driving our economy for some time. This proposal might bring the red hot housing industry to a halt; this would seriously damage the overall economy. This proposal has been around since the 80s and has always meet strong opposition in Congress. Hopefully this President’s lame duck days will be here sooner than later.

Are you a homeowner with a mortgage? President Bush is planning to take money out of your pocket.

The tax reform commission appointed by President Bush agreed this week to recommend a significant reduction in the amount of mortgage interest a homeowner can deduct from their taxes. If a nationwide cap on mortgage interest deductions is established following the commission’s recommendations this could have a significant impact on your pocketbook. The panel alleges they tried to take into consideration the disparity in home values from state to state; their recommendation has a ceiling based on the local housing market. The panel did not disclose how this limit on mortgage interest deduction would impact second homes or investment properties.

This Presidential commission, called the President’s Advisory Panel on Federal Tax Reform, does not set policy, they only make recommendations. The panel will meet once more on October 18th to finalize the recommendation before submitting them to the Treasure Department. Opponents of the commission’s recommendations state that the mortgage interest tax deduction helps foster homeownership, which is good for the community and the individual. President Bush asked the panel to find ways to make the Tax Laws simpler and better suited for economic growth. On this count they have failed miserably. The President also told them the recommendations they make should not cost the government any money.

The President’s panel has no estimate of how much revenue will be generated by cutting back the mortgage interest deduction; however, according to the White House, the potential revenue generated would be just under 1.2 trillion dollars.