Housing Readings - Housing Spring 2011 1 HOUSING...

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Housing – Spring 2011 HOUSING REFINANCING WORKSHEET COSTS OF REFINANCING: 1. Discount points $ 2. Closing costs 3. Prepayment penalty (if any) 4. Total cost of new mortgage (line 1 + line 2 + line 3) $ BENEFITS OF REFINANCING: 5. Current monthly payment (PI) $ 6. New monthly payment (PI) 7. Pretax saving/month (line 5 - line 6) $ 8. 100% minus your marginal tax rate 9. After-tax savings/month (line 7 x line 8)* $ NUMBER OF MONTHS TO BREAK EVEN: (line 4 29 line 9) * This is an estimation that is not absolutely accurate since all of the payment is not deductible -- only the interest portion. However, this provides a relatively good estimate for planning purposes. POINTS ABOUT POINTS 1. One point equals 1 percent of the loan amount. On an $85,000 loan, 1 point equals $850. 2. A loan origination fee is usually 1 point, which is paid by the buyer to the lender at closing to activate the mortgage, and to pay for overhead costs incurred by the lender in setting up the loan. When the origination fee 1) is to buy your principal residence, 2) is an established business practice in your area, and 3) does not exceed the number points generally charged, you may deduct the loan origination fee as mortgage interest in the year you paid it. 3. Other points--often called discount points --can be paid at closing to obtain a more attractive loan with an interest rate that is below current market rates. The payment of these points enables the buyer to get a loan with lower monthly mortgage payments than would be possible if the points were not paid. These lower monthly payments make it easier for the buyer to qualify for the loan. By paying points, the buyer has a wider range of financing choices available. A simple two-choice example might be between a $60,000 loan at 7% with 3 points (3 x $600 = $1,800) paid at closing or a $60,000 loan at 8.5% with no points. Actually, the marketplace offers many different choices and can be confusing to the buyer. Services are available to assist buyers in providing comparison data about available financing alternatives for a fee. These are mortgage- reporting services, computer networks and mortgage pre-qualification programs. Some of the factors a prospective home buyer might want to consider in choosing a mortgage which includes points are the following: (1) probable length of home ownership, (2) reduction in monthly payments resulting from payment of points; (3) present availability of funds to pay points as well as down payment and other initial move-in costs, and (4) willingness of other parties to help 1
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Housing – Spring 2011 with payment of the points. The IRS has reversed long-standing rules regarding the deductibility of discount points. The change is retroactive ...applies to points paid after 1990. Under new IRS rules, points are deductible in full in year paid , when they satisfy a five-part test announced in Revenue Procedure 92-12: 1. They must be paid in connection with buying a primary home. 2.
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Housing Readings - Housing Spring 2011 1 HOUSING...

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