Tax Tips
Tax Tip No. 6: Close on Your Mortgage in 2007
If you are about to seal the deal on a new home, closing on your mortgage by December 31 could earn you a big deduction on your 2007 return.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
December 10, 2007
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While most expenses of buying a home are not deductible, there's a big exception when it comes to points paid to get a mortgage. Each point is 1% of the mortgage amount. So if you pay two points on a $200,000 mortgage, that's $4,000.
When the house you're buying is your principal residence, the entire expense is deductible in the year you pay it. And, get this: You get to deduct the points even if you persuade the seller to pay them for you.
If you made a small downpayment when you bought your home, you may qualify for another tax break: deducting the private mortgage insurance or PMI required of homebuyers who put down less than 20% of the purchase price.
There's a different rule for points paid when refinancing a home loan. But, still, closing the deal by year-end could pay off. Points paid on refinancing are deducted over the life of the loan. That means you deduct 1/30th of the cost each year on a 30-year mortgage, for example.
But, if you're among the millions of serial refinancers -- homeowners who have refinanced more than once -- closing by December 31 could buy you a big write-off.
Some homeowners, concerned about mortgage market jitters, are racing to trade their adjustable rate mortgages for fixed-rate notes. When you refinance a loan that resulted from a previous refinancing, that ends the life of the first refinancing and means all as-yet-undeducted points can be written off at once. (One exception to this: If you refinance with the same lender who holds your current loan, undeducted points on the loan you're refinancing are deducted over the life of the new loan.)
Bottom line: If you're close to closing, check with the officials involved to see if you can speed things up to accelerate the tax benefit.
Return to: 15 Year-End Tax Moves
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Reader Comments (2)
Posted by: carly at 12/11/2007 04:37:27 PM
If you've just bought your first home and don't have enough to itemize, you will not benefit from "deducting your points." This is the most misunderstood tax deduction new homeowners realize when they get ready to file their taxes!
Posted by: mamima at 12/16/2007 08:11:53 PM
my comment is a question: do this tax break applies to 2006 as well?