added to loan balance. Your year-end mortgage statement will show the total amount of interest generate on the loan and the amount that you actually paid. You may only deduct the interest you pay. The unpaid portion will only be deductible when you actually pay it, perhaps several years later.
Tip #53:
Reverse mortgages. A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. You don’t have any mortgage payments. What a relief. With a reverse mortgage, you retain title to your home. Depending on the plan, your reverse mortgage becomes due, with interest, when you move, sell your home, reach the end of a preselected loan period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full.
Tip #54:
Reverse mortgage warning. While you might be relieved not to have to pay a monthly mortgage payment anymore, beware, and read everything carefully. Anything you don’t understand, have them explain, slowly, until you do understand. The interest on the reverse mortgage is generally higher than interest you would normally pay on a regular mortgage. There are a lot of fees they charge that get added to your loan balance. You cannot get any additional cash out of the home if you need it in an emergency. Your reverse mortgage lender controls your equity. If you are married, or have someone you care about (like your child or a friend) living in the home, make sure they are on title before getting the reverse mortgage. Otherwise, if you are forced to move out into a convalescent facility or senior home, they may be kicked out of the house. The lender will demand payment or force the sale of the home when the “owner of record” no longer lives there. So if they are on the title before the loan is issued, they will be protected. But . . . watch out for potential gift and estate tax issues if you add them to title. It would be a good idea to discuss the details about, and alternatives to, reverse mortgages with a tax professional and/or tax attorney.
Tip #55:
Personal residence points. These are the extra fees you typically pay when you get a mortgage. When you buy the home, they are fully deductible. Incidentally, if the points are added to your mortgage and you do not actually pay them, there is no deduction. What if the seller pays your points to help you buy the house? Do you get a deduction? No again. If you don’t spend, you don’t deduct. If you did pay the points, how can you prove that you paid them? Deposit a check for the amount of the points into escrow, or pay it directly to the lender or loan broker. Otherwise . . . there is no deduction at all. Incidentally, if the points are not reported to you on the Form 1098 from your lender, read the instructions to Schedule A and enter those points on line 12 instead of including them on line 10.
Tip #56:
Refinanced points. When you refinance that first mortgage, you must deduct the cost over the life of the mortgage. That is called amortization. If the mortgage is for 30 years, the points are deducted over 360 months. Let’s say you refinanced in the beginning of September. That first year, you will deduct 4/360th of the points (September to December = 4 months). From then on, you will deduct 12/360th until the last year when you deduct whatever is left over.
Tip #57:
Refinanced again points. You have already refinanced once, right? You paid $3,000 and have been able to deduct about $250 so far. But you found a better interest rate (or your credit improved) and you can refinance again. OK, you will amortize the new points as we have described. But what do you do about the old points? You still have $2,750 that hasn’t been deducted, right? Great news! You may deduct that entire balance, since that loan has been paid off.
Tip #58:
Someone else’s points. Sometimes we use incentives to sell our properties. For instance, to close a sale, you offer to pay the buyer’s closing costs, including their points. Is that a deduction to you, as the seller? Nope. That is part of the selling price. You add this to your selling costs and it reduces your overall profit on the sale. So you think this comes out the same in the end? Think again. If the profit on your home is under $250,000 (or $500,000 when you file jointly), you won’t be paying taxes anyway. So this doesn’t matter. And you didn’t get the deduction for the points, since it wasn’t your loan obligation. But at least you finally got to sell the home and stop paying for that mortgage.
Tip #59:
Private mortgage insurance (PMI; https://www.irs.gov/publications/p936/ar02.html#en_US_2014_publink1000296058). This is insurance that you must pay for if your down payment is too low. It’s designed to protect the lenders in case you default. This expense became an allowable deduction sometime around 2007 (https://www.law.cornell.edu/uscode/text/26/163#.Vh_JqivSmSY). However, this is one of those political footballs (like the huge $250 deduction for educators’ costs). Each year, Congress needs to reconsider this deduction and extend it—or not. At the time of this writing, the PMI deduction was good for last year but is not yet approved for this year (2015). Oh Good! Congress extended this through December 31, 2016, as part of the Internal Revenue Code as Section 152 of the PATH Act of 2015. Please see Bonus Tip #270 for more details.
What’s the fuss all about? After all, when your AGI is higher than $100,000 ($50,000 if married filing separately), your deduction phases out. So why can’t Congress make this permanent? Write to your legislators and ask them (http://taxmama.com/special-reports/call-to-action). Meanwhile, before claiming this deduction, please Google the deductibility of PMI each year. That said, just how much is deductible?
• You may deduct the premiums you paid in the current year for the current year. In other words, if you paid a large lump sum in advance that covers several years, you may only deduct the premium for the current year.
• You may only deduct PMI on acquisition debt—that is, loans used to buy, build, or improve a home. You may not deduct it when you refinance.
• For veterans who get loans from the Department of Veterans Affairs, it is commonly known as a funding fee. If it is provided by the Rural Housing Service, it is commonly known as a guarantee fee. Regardless of what it’s called, it follows all the same rules as private mortgage insurance.
Tip #60:
Make your PMI payment go away! As soon as you can, make this financial drain disappear. When your mortgage balance is 80 percent or less than the value of your home, you can make a written request to your lender to cancel the PMI premiums. How can the mortgage balance get that low? A couple of ways:
• Market conditions have improved since you bought the house. If you think they have improved enough, get a formal, written appraisal to prove it. Submit that to your lender.
• You have paid down the principal balance. You can do this by paying a little more than the regular principal payment on your mortgage. For instance, consider adding $50 or $100 per month to your payment. This will bring the principal down slowly. If you can afford a few hundred dollars per month, that will help.
• You have made a lump sum payment on the mortgage to bring it down to below 80 percent of the fair market value of the
