Rush to Close on Mortgages and Refinancing

Tax Tips

Rush to Close on Mortgages and Refinancing

Closing on your mortgage or refinancing an existing loan by December 31 could earn you a big deduction on your 2010 return.

Weak housing prices may be a seller’s nightmare, but they’re 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% 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 is a different rule for points you pay when you refinance 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, for example, you may deduct 1/30th of the cost each year on a 30-year mortgage.

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If, however, 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. Say you refinance a mortgage with an outstanding balance of $80,000 with a new, 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 worth of home improvements, you may deduct 20% 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 December 31 could buy you a big write-off.

The Federal Reserve Board’s new plan to pump $600 billion into the economy is likely to keep already-declining mortgage interest rates low. Some homeowners see an opportunity now and are racing to refinance older mortgages by year-end. 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 may be written off at once. (One exception: If you refinance with the same lender that holds your current loan, undeducted points on the previous loan are deducted over the life of the new loan.)

Bottom line: If you're close to closing, check with the officials involved to see if you can speed things up to accelerate the tax benefit in time to claim it on your 2010 return.