Rush to Close on Mortgages and Refinancing

Weak housing prices may be a seller’s nightmare, but they’re a boon for buyers able to scoop up a bargain. Although most expenses connected with 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're permitted to deduct the points even if you persuade the seller to pay them for you.

There is a different rule for points you pay when you refinance a home loan, but closing the deal by year-end could still pay off. Points paid on refinancing are deducted over the life of the loan. That means, for example, you may deduct 1/30th of the cost each year on a 30-year mortgage.

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If, however, you use part of your new loan to improve your home, you may be entitled to a larger first-year deduction. Points relating to the portion of the loan used for home improvements may be fully deductible in the year you pay them. Say you refinance a mortgage with an outstanding balance of $80,000 with a new, lower-rate loan for $100,000. If you use the proceeds of the new mortgage to pay off the old loan and to pay for $20,000 worth of home improvements, you may deduct 20% of the points you pay on this year’s return.

And 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.

The Federal Reserve Board’s new plan to pump $600 billion into the economy is likely to keep already-declining mortgage interest rates low. Some homeowners see an opportunity now and are racing to refinance older mortgages by year-end. When you refinance a loan that resulted from a previous refinancing, that ends the life of the first refinancing and means that all of the yet-undeducted points may be written off at once. (One exception: If you refinance with the same lender that holds your current loan, undeducted points on the previous loan 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 in time to claim it on your 2010 return.