If I roll refi charges into a mortgage, will interest on that mortgage still be fully deductible?

[jfruh]

Hello all!

Currently we own a home where we have both a fixed-rate mortgage and a variable-rate HELOC. We have the HELOC for complicated reasons that I can go into if necessary but both loans are wholly acquisition debt -- all the money went to buying the house, and we have never taken any cash out of the HELOC since.

Since the HELOC is variable rate and only has a 10 year term, I am now trying to refinance things to get the complete debt onto one 30-year fixed loan. It looks like I will be able to do this, but in the process will need to roll some of the closing costs of the refi into the loan itself.

I know that, under the new tax law just passed, you will only be able to deduct interest on the portion of your mortgage or HELOC that represents "acquisition debt." My question is: will the amount added to the loan by the refi costs trigger this provision? That is, will I only be able to claim interest on the amount of debt that I had before the refi, and will need to exclude the extra debt from the refi charges until I pay that part down?

I know this is new law and may not be entirely clear yet. Thanks in advance for any guidance you can offer. 

[ScottT]

As your Primary Home, refi charges such as closing costs or settlement costs were already added to the amount of your fixed and HELOC loans when you received the loan. If you are working on refi both loans into one new 30-year fixed loan, both loans will have a payoff balance amount. When you refi into the new loan, there will be closing costs associated with the new loan. The new tax law was extended for the mortgage insurance premium deduction that expired in 2016. You can still deduct Mortgage Interest for both loans paid in 2017 and your Bank or Lender should have already sent you a 1098 form for each loan. The form should have information about your loan, property taxes, mortgage interest, mortgage insurance premium, and outstanding mortgage balance. In addition, points or origination fees is amortized over the life of the loan or 84 months. See helpful information below. https://ttlc.intuit.com/replies/3996369

[jfruh]

Hi Scott! Thanks for the answer, but I'm not quite sure how it applies to my situation. I think I see the source of the confusion, so let me explain: The refi hasn't happened yet -- it hopefully will close later this month -- and we bought the house in 2016, so 2017 tax year isn't relevant at all.

Let me give some simplified numbers to get at what I'm asking. Say we right now have $400,000 on the fixed-rate mortgage and $50,000 on the HELOC. As noted, this is all acquisition debt (and yes, I understand that some of the mortgage origination fees from the original purchase of the house are ultimate part of that.)

So, say next week we refi. We don't get any cash out, but there are $5,000 in fees that get rolled into the new loan. So we end up with a new fixed-rate mortgage of $455,000.

My question: is all of our mortgage interest on this new loan deductible going forward? Or do I have to exclude part of the interest (about 2 percent) representing the fees, until the loan balance gets back down to $450,000?

[jfruh]

(also we don't have private mortgage insurance, so that doesn't apply in this situation.)

[ScottT]

Yes, your new loan will be just like your current loan deductions each year. The Bank or Lender will send you a 1098 Tax Form each year to report on your tax return. Since you have purchased the home in 2016, you were able to take the mortgage deductions for that year, and also you can do the same for 2017. For your new loan in 2018, you still follow the same process, deductions from the new loan will be deducted in 2018 tax year, even though you don't have private mortgage insurance. Hope this helps?

[jfruh]

It does, thanks!