use this example on how to combine the 3 mortgages into one (although for simplicity, I will use two, but you will get the drift)
Assume ..
- Early in the year I had a $500,000 mortgage at 5% interest that I refinanced during the year. At the time of the refinance, the mortgage balance was $450,000 and the interest on the 1098 was $6,000
- Then I cash out refinanced to a new $560,000 mortgage at an interest rate of 3%, The 1098 showed $12,000 of interest. I did not use the proceeds to improve my home
My average loan balance for the year was:
$6,000 / .05 = $120,000
$12,000 / .03 = $400,000
$120,000+$400,000 = $520,000 which is my average balance for the year
The ending balance at the time of the refinance was $450,000, so $70,000 was cash out. $70,000/$520,000 is 13.46%, so that percent of the total interest of $18,000 is NOT tax deductible.
Create a 1098 using the name of the most recent servicer showing the mortgage balance as $520,000, the interest as $15577.20 ($18,000 *.8654) and when asked about cash out, say there wasn’t any.
to further the example, next year my 'acquisition debt' remains at $450,000 until the mortgage amortizes down to that level. So the percent of the mortgage that exceeds $450,000 also represents the percent of the interest that is not tax deductible. Easy to show that $450,000 * 3% or $13,500 will be deductible next year while the rest, whatever that is, won't be.
