What to Consider When
Refinancing: Tax Cost
There can be some
significant benefits that are associated with home mortgage
refinancing. There are also some other factors that
you do need to keep in mind when it comes to home mortgage
refinancing. You need to weigh and balance the costs
and benefits associated with home mortgage refinancing.
In this article, you
will be presented with some information pertaining to
the tax cost and related implications of home mortgage
How Does the Tax Deduction Work in
the First Instance
To understand your
tax costs in refinancing, letís review how the tax deductions
work on interest payments and mortgages in the first
place. Remember that paying a mortgage is perhaps the
best way to reduce your tax bill through deductions.
The current tax codes provide for deductions on interest
paid on first and second homes as long as the total
loans are less than $1.1 million.
Weighing and Balancing the Tax Impact
of Home Mortgage Refinancing
This information may
seriously affect the loan product you choose. If your
increase in taxes overshadows your savings on your monthly
payments, there is really little reason to refinance.
Itís known for that reason that a 30-year mortgage has
a better deduction than a 15-year mortgage, and the
tax deductions are generally better.
An Example for Your Consideration
For instance, for
a $150,000 loan amount at 6.5% (and tax rate of 25%,
along with other factors being equal) will have a tax
savings of $3,472 on a $30-year fixed rate loan the
first year, but only $3,432 per year on the 15-year
loan. While this is only a $40 change, the higher the
loan amount the larger the difference; always check
and make sure it will benefit you to refinance. If you
are only staying in the house a few years, ask your
loan representative to compare these figures to the
interest only loan and the ARM.
The Tax Consequences -- Money You
Most of the time,
however, the tax will appear in the form of savings.
Only occasionally will you see taxes increasing beyond
the benefits of refinancing. Even the points you use
to pay down your interest rate are deductible because
they are related to paying interest, according to the
IRS. Remember that a point is 1% of your loan principal,
and some mortgage brokers let you add it to the loan
amount. That means you are adding interest payments,
but you will also be able to use it as a deduction over
the life of the loan. If you pay the points up front,
you can take the deduction for that tax year.
Conclusion and Summary
Make sure you know
how your payments will affect your taxes, and do what
will work best for your situation. If you have any doubt
or are not clear on what your loan representative has
told you, speak with a tax consultant.