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Getting a Home Mortgage

So, you're interested to get a mortgage for your dream house. In order to do this, there are some steps you need to get the right home mortgage for you.

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Basic Mortgage Terms

If it is your first time applying for a mortgage, there are a number of terms you should know. Educating yourself on the various mortgage terms you will run into will help you make better decisions when deciding which home you want to purchase. When you sign a mortgage contract, your home is used for collateral and it is your responsibility to make sure your payments are made on time each month.

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How to Deduct Points on a Mortgage Loan

by Alan D Campbell

A point on a mortgage loan is one percentage point of the loan. For example, two points on a $200,000 mortgage loan would be $4,000 ($200,000 x 2%). Points represent prepaid interest.

A taxpayer who uses the cash method of accounting may deduct points paid on a loan to buy or improve a principal residence as long as the points are a normal business practice in the area, are reasonable in amount, and the loan is secured by the residence (Sections 163(h)(3)(B) and 461(g)(2)). Interest, including points, on a loan to acquire or improve the taxpayer's residence is limited to the interest on the first $1,000,000 of the mortgage loan.

The limit on deductibility of interest on a loan to acquire a residence applies to the taxpayer's principal residence and one other residence (Section 163(h)(4)(A). However, a taxpayer may deduct points paid in the year paid only in connection with a mortgage loan on the taxpayer's primary residence (Section 461(g)(2)). If a taxpayer pays points on a mortgage loan to purchase a second home, the taxpayer must amortize the points over the life of the loan.

A taxpayer claims the deduction on Schedule A of Form 1040. A buyer may deduct the points even if the seller pays them (Rev. Proc. 94-27, 1994-1 CB 613). A taxpayer who uses the accrual basis of accounting must amortize the points over the life of the loan.

If a taxpayer pays points on a home equity loan, the taxpayer may not deduct the points immediately unless the taxpayer uses the proceeds of the home equity loan to improve the property. If the taxpayer does not use the proceeds of a home equity loan to improve the property, the taxpayer must amortize the points over the life of the loan (Sections 163(h)(3)(C) and 461(g)(1)).

The deduction of interest, including points, on a home equity loan is limited to the interest on a home equity loan up to $100,000 unless the taxpayer uses the home equity loan for business purposes. If the taxpayer pays the loan off early, the taxpayer may deduct the unamortized points in the year paid (Temp. Regs. Sec. 1.163-10T(j)(3)).

The same rule that applies to a home equity loan also generally applies to a refinancing of a taxpayer's mortgage loan. The taxpayer may not deduct the points immediately. The taxpayer must amortize the points over the life of the loan. If the taxpayer pays the loan off early, the taxpayer may deduct the unamortized points in the year paid.

However, for taxpayers who live under the jurisdiction of the U. S. Court of Appeals for the Eighth Circuit, if the taxpayer pays points on a mortgage loan and uses the proceeds to pay off a short-term bridge loan, the taxpayer may deduct the points in the year paid (Huntsman v. Commissioner, 90-2 USTC Para. 50,340, CA-8, 1990, rev'g 91 TC 917). The U. S. Court of Appeals for the Eighth Circuit has jurisdiction over taxpayers in the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

If a taxpayer pays points on a mortgage loan to acquire undeveloped land, a commercial building, or rental real estate, the taxpayer must amortize the points over the life of the loan. If the taxpayer pays the loan off early, including a sale of the property, the taxpayer may deduct the unamortized points in the year paid.

Taxpayers should remember to deduct points paid in connection with a mortgage loan to purchase or improve their principal residence, whether the purchaser or seller pays the points. For points paid in connection with a refinancing of a mortgage, to obtain a home equity loan, or to obtain a mortgage loan on rental or commercial property, taxpayers should remember to deduct the points over the life of the loan and deduct the unamortized points in the year the taxpayer pays the loan.

About the Author

Alan D. Campbell is a CPA in Arkansas and Florida and is self-employed primarily as an author of tax publications. He is the co-author of the book Tax Strategies for the Self-Employed. For more tax savings strategies, please see his Tax Savings Strategies blog http://taxsavingsstrategies.blogspot.com

A Guide to Finding the Best Personal Loan Rate

Finding the best personal loan rate that you can get isn't always easy... it does, however, save you a lot of money in comparison to simply taking the first interest rate that you're offered for a loan.

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