I receive numerous questions on a daily basis regarding closing costsand the options available at closing. I wanted to take a few minutes and hopefully make the whole subject of closing costs a little more simplified.
Mortgage Points:
1- What are they and how can we use them to our advantage?
A "POINT" is a fee- 1% of the loan amount- that your mortgage lender charges up front. If the charge is for use of the borrowed money, as it is when the number of points charged affects the interest rate on the mortgage, rather than for loan processing fees,, the point is considered PREPAID INTEREST.As long as the home you purchase is you primary residence these points are fully deductible in the year you paid them.
Assume that you take out a 100,000 mortgage and you have to pay 3 points. Your points will cost you 3,000.00 and you can write off every bit of that 3,000.00 on your tax's that year. See your SCHEDULE A on your tax forms.
A standard piece of advice, in the past, was to write a separate check to pay the points as proof of the expense and that it was not rolled into the mortgage. This practice is no longer necessary.
There are still a list of rules to be followed. Points paid must be in line with area norms
1-The charge must be based on a percentage of the loan amount and it must be clearly labeled on the settlement sheet ( HUD FORM) as points, discount points or loan origination fee for examples.
2-By closing, you must provide at least enough cash to covor the points. This can include your down payment, escrow deposits or earnest money.
If you make a 20,000 down payment you can actually roll points into the mortgage amount and still deduct the points in the year you bought the home.
What if the SELLER pays some of the points?
In the 1994 the IRS decided that buyers can deduct points paid by SELLERS as well as those they pay themselves.
Prepaid interest and property tax adjustments
If your statement costs include reimbursing the seller for interest or tax's they paid in advance, You may deduce those amounts as though you paid the bills directly. Make sure it is clearly marked on your settlement sheet.
Please check with your lender reguarding all current tax laws. They change rather frequently, so make sure you ask many questions when meeting with your lender. Another bit of solid advice is to consult with an experienced Tax Accountant, they will advise you of any current change in the Tax Law.
Have any other questions about BUYING or SELLING a home? Send and email to BerksRealtor@yahoo.com for fast and confidential answers.
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Tom Brintzenhofe-Exit Diamond Realty-Pennsylvania
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