Deducting
Your Mortgage Interest Under the Tax Code
One of the best justifications for owning a home, at least
for financial reasons, is the tax savings that result
from deducting mortgage interest. The deduction for
mortgage interest stands as one of the few remaining
tax deductions for the typical middle class taxpayer.
Despite the changes to the tax code over the past several
years and the repeal and limitation of many non-housing
itemized deductions, mortgage interest is still deductible.
On first and second mortgages and home equity lines
of credit (with some limitations) for first and second
homes, your mortgage interest deduction is still a good
financial incentive to buy a home.
In conclusion, a homeowner should plan on paying an average of 3 to 6 percent of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist. One way of saving on some of these costs is to check first with the lender who holds your current mortgage. The lender may be willing to waive some of them, especially if the work relating to the mortgage closing is still current. This could include the fees for the title search, surveys, inspections, and so on.
The
information contained in this brochure is intended to
help you ask the right questions when considering refinancing
your loan. It is not a replacement for professional
advice. Talk with mortgage lenders, real estate agents,
attorneys, and other advisors about lending practices,
mortgage instruments, and your own interests before
you commit to any specific loan.
Is
the next interest rate adjustment on your existing
loan likely to increase your monthly payments substantially?
Will the new interest rate be two or three percentage
points higher than the prevailing rates being offered
for either fixed-rate loans or other ARMs?
If
the current mortgage sets a cap on your monthly payments,
are those payments large enough to pay off your loan
by the end of the original term? Will refinancing
a new ARM or a fixed-rate enable you to pay your loan
in full by the end of the term?
The
fees described below are the charges that you most likely
to encounter in a refinancing.
Application Fees
This charge imposed by your lender covers the initial costs of processing you loan request and checking your credit report.
Title
Search and Title Insurance
This charge will cover the cost of examining the public record to confirm ownership of the real estate. It also covers the cost of a policy, usually issued by a title insurance company, that insures the policy holder in a specific amount for any loss caused by discrepancies in the title to the property. Be sure to ask the company carrying the present policy if it can re-issue your policy at a re-issue rate. You could save up to 70 percent of what it would cost you for a new policy.
Lender's Attorney's Review Fees
The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender. Settlements are conducted by lending institutions, title insurance companies, escrow companies, real estate brokers, and attorneys for the buyer and seller. In most situations, the person conducting the settlement is providing a service to the lender. You may want to retain your own attorney to represent you at all stages of the transaction, including settlement.
Loan Origination Fees and Discount Points
The origination fee is charged for the lender's work in evaluating and preparing your mortgage loan. Discount points are prepaid finance charges imposed by the lender at closing to increase the lender's yield beyond the stated interest rate on the mortgage note. One point equals one percent of the loan amount. For example, one point on a $75,000 loan would be $750. In some cases, the points you pay can be financed by adding them to the loan amount. The total number of points a lender charges will depend on market conditions and the interest rate to be charged.
Appraisal Fee
This fee pays for an appraisal which is a supportable and defensible estimate or opinion of the value of the property.
Prepayment Penalty
A prepayment penalty on your present mortgage could be the greatest determent to refinancing. The practice of charging money for an early pay-off of the existing mortgage loan varies be state, type of lender, and type of loan. Prepayment penalties are forbidden on various loan including loan from federally chartered credit unions, FHA and VA loans, and some other home-purchase loans. The mortgage documents for your existing loan will state if there is a penalty for prepayment. In some loans, you may be charged interest for the full month in which your prepay your loan.
Miscellaneous
Depending on the type of loan you have and other factors, another major expense you might face is the fee for a VA loan guarantee, FHA mortgage insurance, or private mortgage insurance. There are a few other closing costs in addition to these.
In
conclusion, a homeowner should plan on paying an average
of 3 to 6 percent of the outstanding principal in refinancing
costs, plus any prepayment penalties and the costs of
paying off any second mortgages that may exist. One
way of saving on some of these costs is to check first
with the lender who holds your current mortgage. The
lender may be willing to waive some of them, especially
if the work relating to the mortgage closing is still
current. This could include the fees for the title search,
surveys, inspections, and so on.
The
information contained in this brochure is intended to
help you ask the right questions when considering refinancing
your loan. It is not a replacement for professional
advice. Talk with mortgage lenders, real estate agents,
attorneys, and other advisors about lending practices,
mortgage instruments, and your own interests before
you commit to any specific loan.
