Mortgage Rate News

There is a great deal of excitement over the home buyer tax credit in the recently passed economic stimulus bill. However, many people are wondering if there are any benefits for those planning to refinance their homes. Sure, most people know about the interest rate tax deduction, but there are other tax deductions associated with refinancing:

1. Points paid.
2. PMI premiums.

There isn’t anything as nice as what’s being offered to home buyers. In fact, neither of these things is new. However, they might be things you haven’t thought about.

Points paid when refinancing

Just as you can pay points when buying a home, you can also pay points when you are refinancing. However, the way you deduct points when refinancing is different. Kiplinger reports on how it works when you deduct points paid during refinancing:

Instead of writing off those points all at once, you must spread the deduction over the life of the loan. Say, for example,you took out a $250,000, 30-year mortgage and paid two points, or $5,000 (each point equals 1% of the loan amount). Because you’re refinancing, you can deduct only one-thirtieth of those points every year — just $166.67 per year for 30 years.

While it’s not a ton, every little bit helps — especially if it’s just enough to drop you to the next tax bracket down (or at least keep you from moving up into the next tax bracket).

PMI premiums

In many cases, people do not have 20% equity in their homes. This is especially true since the beginning of this decade. If you have less than 20% equity in your home, you are required to pay private mortgage insurance (PMI). This covers the cost of your mortgage if you default. When you refinance, you still have to pay for PMI if you owe more than 80% on your home. Happily you can deduct this amount if your mortgage loan was taken out in 2007 or later. You have to itemize, though, and there are some income requirements.

It’s worth looking into the tax deductions you can get when refinancing. It’s best to consult with a tax professional before making your decisions, however. I am not a tax professional.

It’s getting crazy out here in the world of finance. Chances are that what is going on right now will affect us for quite some time to come. But that isn’t going to stop our leaders from continuing its policies. No matter that they probably won’t help accomplish stated short term and long term economic objectives. At any rate, here are some of the highlights of this past week:

1. Bank of America to get a bailout. Great stuff. After making poor business decisions and then lying about it, Bank of America gets a bailout, courtesy of U.S. taxpayers. What I still don’t understand is why people get all bent out of shape over helping regular folks avoid foreclosure, but barely bat an eyelash at giving billions to a bank that made terrible decisions and is bringing us down with it.
2. TARP funds to be released. Back when the TARP fund idea was release, only half of the money was allowed to be paid out at once. Now, though, Congress is ready to release the other half of the TARP bailout funds. This time, Congress insists that proper controls be placed on the money. I’m not very hopeful, though. We have no idea of what happened to the last $350 billion, and I don’t think that we’ll have any idea what happens to this $350 billion. For some reason, the word of Congress just isn’t something I trust.
3. Economic stimulus legislation unveiled. A new economic stimulus bill has been unveiled. One that supposedly supports investment in America, will promote jobs, and help the regular folks (through local state funding and tax cuts). Again, I’m not sure what will be accomplished by this. It seems like a lot of the same stuff. But one can always hope.

What was your favorite bit of finance news this week?

In the past, when you have a tax lien placed on your home in order for the IRS to try to get you pay what you owe, it is difficult to refinance or sell your home. This is because a tax lien means that the IRS has first claim to the money. Mortgage lenders who already lent the money would lose out by refinancing or authorizing a mortgage on a home with a tax lien, since any money that remained would go to the IRS — not the mortgage lender. So, even if you find a buyer, you may  not be able to sell your house with a tax lien.

Now, though, with the economy and housing market in so much trouble, the IRS is relaxing its stance, allowing mortgage loans to take precedence of tax liens in some cases. Financial USA points this out about the process of tax liens, and the new program:

Typically, when a homeowner owes past-due taxes, the IRS will file a Notice of Federal Tax Lien on his property, informing other creditors that the IRS has a legal claim. That claim then has to be repaid when the property is sold or refinanced-which can be problematic if the homeowner owes more in mortgage debt than the property is worth.

The new program will ease this burden by allowing certain tax liens to take a secondary position to mortgage-related liens. In some cases, the tax liens may even be discharged. When announcing the program, IRS Commissioner Doug Shulman indicated that he didn’t want his agency to inhibit distressed homeowners from taking steps to improve their finances.

Of course, it is important to realize that just because the tax liens are no longer pre-eminent, the tax liability remains. If you owe taxes, the IRS is still going to want to collect. You can find more information on requesting a certificate of lien subordination in Publication 784, found on the IRS Web site.