Refinancing can bring tax savings 'Leftover' points are deductible

April 18, 1993|By Ann Perry | Ann Perry,Copley News Service

The April 15 tax deadline has passed, but some homeowner can start planning for hefty tax savings in 1993.

If you're among the growing number of homeowners who recently refinanced a mortgage for the second or even third time, your "leftover" loan points might entitle you to a big tax deduction.

Points are upfront fees charged by lenders, typically between 1 percent and 2 percent of the mortgage loan. When you refinance a mortgage, the IRS lets you deduct those fees over the life of the loan.

For example, a homeowner who refinances a 30-year, $150,000 mortgage at two points can deduct $3,000 over 360 months. Amortizing the points that way works out to $8.33 per month or about $100 per year.

That won't dramatically alter the average tax bill. But if the homeowner refinances a second time, taking advantage of still-falling interest rates, he can deduct the balance of the points.

"It can make a big difference, writing off $2,000 or $3,000 in leftover points on an old loan," said Constance Whitney, a federally licensed tax preparer.

"I have some clients who refinanced two or three times in 1992," she said. "It gets a little wild."

A taxpayer in the 28 percent tax bracket who deducts $3,000 in points in 1992 would save $840 in taxes.

A taxpayer also can write off the balance of points when selling a home that had a refinanced loan.

Because mortgage interest rates have dropped so dramatically since 1991 -- from about 10 percent on a 30-year, fixed-rate loan to less than 7 1/2 percent -- multiple refinancings have become increasingly common.

Last year "was the year of refinancing," said Leland Brendsel, chief executive officer of the Federal Home Loan Mortgage Association, or Freddie Mac. The publicly chartered agency packages home mortgages for sale as securities.

"One-third of all existing loans were refinanced in 1992," Mr. Brendsel said. "Many consumers refinanced twice. I did, personally."

Mr. Brendsel predicted that in 1993, one-fourth of existing mortgages will be refinanced.

"We're seeing people who've refinanced in the past 12 to 24 months starting to come back in again," said Randy Willox, a regional vice president of Countrywide Funding Corp., the nation's largest originator of home mortgages.

Mortgage rates are at their lowest levels in 20 years. Recently, a borrower could get a 30-year, fixed-rate mortgage at 7 1/4 percent, paying two points, or at 7 3/8 percent and 1 1/4 points, or 7 3/4 percent and no points.

A 15-year loan can be had for 7 percent and one point, while variable loans are available at 5 1/4 percent and one point.

It used to be that homeowners were advised not to refinance unless they could reduce their mortgage interest rate by 2

percentage points -- say, to 8 percent from 10 percent.

But for a growing number of homeowners, it can pay to shave just 1 percentage point off the loan, according to financing experts.

"These days, if you really work the numbers, it makes sense," said Lawrence Frauens, senior loan officer at Commonwealth-United Mortgage. "In tough economic times, people will go the extra mile and work a little harder to save."

Lenders report an increasing interest in "zero-point" loans. But those loans carry a higher interest rate than mortgages with points.

The points are part of your loan's interest. That's why the IRS lets you deduct points along with the rest of the interest on your home loan, said Curt Welker, an accountant.

In some cases, homeowners can deduct all of their mortgage points in one year instead of spreading them through the life of the loan, Mr. Welker said.

When taking out a new loan to buy a home, as opposed to refinancing an existing mortgage, borrowers are eligible to deduct all their points in the first year. But they must have put at least as much cash into the escrow account as the amount of the points. (And the money must be theirs, not borrowed.)

The IRS then considers the points to be paid up front, even if the escrow proceeds are used for other purposes.

If the escrow account falls below the amount of the points, though, the points must be deducted over the life of the loan.

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