Prepaid interest, sometimes called “points”, is generally tax deductible when a person pays them in connection with buying, building or improving their principal residence. When points are paid on a refinance, they are not a current deduction but have to be taken prorata over the life of the mortgage.
For instance, if $3,000 in points were paid on refinancing a 30 year mortgage, a deduction of $100 per year is allowed. When the loan is paid off or replaced by refinancing again or the home is sold and the mortgage paid off from the proceeds, the balance of any un-deducted points may be taken in that tax year.
Your tax professional needs to be made aware of any of these situations so that he or she can accurately reflect the deductions in your return. Currently, the most common situation is homeowners may be refinancing their home for the second, third or even, fourth time. If there are points that have not been completely deducted, they need to be treated in the year of refinancing.
For more information, see points in IRS Publication 936; there is a section on Refinancing in this publication. For advice considering your specific situation, contact your tax professional.
How’s Your IQ on the QM?
The Qualified Mortgage Rule came into effect on January 14, 2014 as one of the results to the Dodd Frank Reform Act to protect consumers from predatory lending practices. This will affect the underwriting standards that the majority of lenders will use to qualify borrowers.
The ability to repay rule states that financial information must be supplied by the borrower and verified by the lender. The borrower must have sufficient assets or income to pay back the loan which limits the maximum debt-to-income ratio of 43%. In an effort to present a more accurate picture of the costs to the borrower, teaser rates can no longer hide a mortgage’s true cost.
A maximum of 3% in upfront points and fees can be paid on behalf of the borrower. There can be no negative amortization, interest-only or balloon payments and the loan term limit cannot exceed 30 years.
While there are more requirements, most deal with good underwriting practices that are followed by reputable lenders such as considering and verifying things that affect the ability to repay the mortgage like income, assets, employment status, simultaneous loans, debt, alimony, child support and credit history.
Specializing in Colorado Springs homes for sale and for rent. Whether you lived here for years or relocating to the El Paso County area. My website is a great resource for buying and selling or leasing and leasing out your next home. My mission is to help you through what some may think is a stressful but I look at it as a rewarding process. My professionalism and knowledge of the real estate market stands out and I will work very hard to succeed in becoming your “GO TO” person in all things Real Estate. I am an outstanding member of NAR(National Association of REALTORS), CAR(Colorado Association of REALTORS), NARPM(National Assocation of Residental Property Managers) CSNARPM(Colorado Springs branch of NARPM), PPAR (Pikes Peak Association of REALTORS), WCR(Women’s Council of Realtors), and the Independent Broker Forum.