Mortgage And Refinancing

Many financial planners are advising home owners that they can save $150,000 or more
in interest charges by accelerating payments on their home mortgages.
They’re only half right.
Although your interest costs will be reduced you may be losing the use of money that could
be  better invested elsewhere. If you invested that money in a mutual fund … or in a new business…
You could end up with more then you would save in interest expenses.
Paying down your mortgage also forces you to give up a terrific tax deduction.
Now that credit card and personal interest deductions are gone your home mortgage is one of the lining sources of deductible interest.
If you are paying 10% on a mortgage in a 40% tax bracket, the mortgage is only costing you 6%.  Accelerate your payments and you’ll lose that deduction forever.
Trap: If you pay down your home mortgage and then decide later to raise money by refi­nancing it, you may not he able to deduct all of the new interest expense or the points unless any increase in mortgage to improve your home.
More problems: Although you’ll still be able to take out a tax-deductible home equity loan for up to $100,000, Congress may very well act to restrict the use of  home equity loans in the near future.

Falling interest rates have prompted many homeowners to refinance their mortgages. Those who ignored the tax consequences of refinancing came in for some unpleasant sur­prises. Keep the following in mind if you’re thinking about refinancing…
Trap: Your interest payments on the new mortgage may not he fully deductible. On a refinancing, home mortgage interest pay­ments are fully deductible as acquisition debt only up to the extent of the old mortgage that was in place at the time of the refinancing.
Suppose you have a $200,000 mortgage. There’s enough equity in the house to allow you to refinance for $250,000. The home Mortgage interest deduction rules will only permit a deduction for interest on $200,000
the amount of the original mortgage debt.
The remaining $50,000 in this example may or may not be deductible depending on (a) what the money is used for and (b)what other debt there is on the property.
If the money is used for home improve­ments, then interest on the remaining $50,000 is fully deductible. If it’s not used for home improvements, then you have to examine what other debt is on the property.
If you do not have a home-equity line of credit, the interest on the remaining $50,000 would be deductible as home-equity borrow­ing. (The law allows you to deduct interest on Lip to $100,000 of home-equity debt.) But if you have already borrowed up to $100,000 of home-equity loans, interest on the remaining $50,000 of the newly refinanced mortgage debt would not be tax deductible as mortgage interest. (It may be deductible as investment interest if you use the borrowed funds to make investments.)
Opportunity: You can deduct points when refinancing proceeds are used for home im­provements. Most people are aware that when they refinance their home mortgage, the points they pay at the time are not de­ductible up front. The points must be amor­tized and deducted a bit each year over the life of the loan. What people forget is that if they refinance and use some of the proceeds for home improvements, a pro rata portion of the points that are paid can then be taken as a current deduction on their tax return.
Example: A couple has a current mortgage of $200,000. They refinance for $250,000 and
spend $50,000 on home improvement- fifth C’Y2 0 of the points they pay currently deductible. The balance points have to be amortized.
Opportunity: You can deduct the number of previously amortized points when you refinance your home a second time. You refinanced your home five year, You’ve been amortizing the points  life of the loan. Then you refinance the balance of the points on the original financing are deductible in full in the year the note is paid in full.

Nearly three out of four mortgage holders pay too much into escrow accounts—set up by lenders with a borrower’s money to pay real estate taxes and home-insurance costs.

Self-defense: Check monthly payments care­fully against copies of all tax and insurance bills. If what’s due in taxes is less than the funds in escrow—seek a refund immediately.

Bottom line: While you pay monthly, the lender might pay only quarterly—or even annually. Any funds held in escrow until those payments come due are the equivalent of giving the lender a no- or low-interest.

Reverse mortgages are the opposite of tra­ditional mortgages. They tap the equity in a home to make regular, fixed monthly pay­ments to the homeowner.
These nontaxable loans—they are loans, not income—are becoming a popular finan­cial tool for older Americans and their chil­dren who worry about taking care of them.
In the past year, many more lenders have been encouraged to make such loans mainly because HUD’s mandate to insure 25,000 of them has led the Federal National Mortgage Association (Fannie Mae) to purchase the loans on the market. That frees up more money so that lenders can make new reverse mortgage loans.
Eligibility: Owner-occupants aged 62 or older whose houses are mortgage-free, or nearly so, are eli­gible. The average age of reverse mortgage bor­rowers is 77. The older you are, the bigger the monthly payment you can get. Reverse mort­gages favor older borrowers because the equity is assumed to be paid out over the rest of your lifetime. From the lender’s point of view, the shorter that time is, the more cash you can get.

Many home owners are finding that they do not qualify for refinancing because their income has declined… their indebtedness has risen or the value of their home has fallen. Also, the Federal National Mortgage Associ­ation—Fannie Mae—has imposed new re­strictions on loans that it buys from banks and other lenders. It now insists that borrowers be able to pay loans at 7% or higher… even if the lender is willing to make a lower-interest loan.