Resources: Newsletter Articles: Q&A: Refinancing and Associated Fees

Note: Writing these monthly articles challenges me to further research and understand the complex world of real estate, and related issues.Thank you for the opportunity to serve you and advance my own knowledge at the same time! Sherry

With interest rates at all time lows, many homeowners are refinancing without understanding the costs involved, whether those costs are deductible, and the options available for handling the costs of refinancing. Evaluating the financial benefits by looking at the number of months it takes to pay for the associated fees versus the money saved by the reduced interest rate is critical. Although refinancing can save you money, there are significant costs involved. Choosing the most prudent time to refinance and the best strategy to pay for the associated fees maximizes the benefits of refinancing.

What fees should we expect to pay in a refinance?
The normal fees that you incur during a refinance are: title and escrow fees, an appraisal fee, credit report, lender fees, processing fees, notary fees and document fees... at an average cost of approximately $3,000. If you choose to reduce your interest rate by paying interest points, this cost would be added to the other fees.

Are there alternatives for handling the fees associated with refinancing?
Refinancing fees can be handled in a variety ways. They can be paid up front, in escrow at the time of funding the loan. The fees can be added to the loan amount; instead of a loan for $300,000, you would finance the fees and the loan would increase to $303,000. A third, and over the long haul most costly, way to deal with your fees is to pay no fees; your loan remains at $300,000 but the interest rate increases. This loan may be advantageous if a short-term loan is needed; if you plan to hold a loan for a longer time it would be more cost effective to pay the costs up front.

We just refinanced, and it didn't really cost us anything because we added the fees to the loan. Or did it?
Adding the fees to your loan means you are financing and paying interest on the fees. If your goal is to reduce out-of-pocket expenses, this choice may be appropriate. Informed decisions can be made by researching the real costs of refinancing and speaking with several lenders to compare available loan products.

We refinanced our home and paid points and closing costs. Are any of the fees deductible?
Deductible fees are essentially limited to home mortgage interest. Points that represent interest paid for a refinanced mortgage must be amortized over the life of the loan, and can not be written off in the year that the loan is originated... unlike a purchase money loan (the original loan). Points charged for specific services, such as preparation costs for a mortgage note, credit reports, appraisal fees, or notary fees, cannot be deducted and do not qualify for basis adjustments. For this reason it is important to keep these fees as low as possible. See the IRS website at http://www.irs.gov for more information (hint: use the search engine!).

Before making financial decisions, it is always advisable to talk to your tax advisor.

An informed reader responds:

Sherry... you are right that points paid on refinancing are generally amortizable over the life of the new loan. However, if you refinance again, all of the balance of previous points become immediately deductible. Some of my clients refinance every year, making points paid on refinancing totally deductible in the year of refinancing or the year after.

Another aspect is the owner's legal liability limits. Only the original mortgage limits your liability to the value of the original house. If you default on your original $500k mortgage, but the value of your house has dropped to $450k, the mortgage company would repossess your house. With the same numbers and a refinanced loan, your house would be repossessed and you would still be liable for another $50k to pay off the loan.

Maria U. Ku, C.P.A. (maria.ku@sbcglobal.net)

sherrybenninger@grubbco.com

The GRUBB Co., 1960 Mountain Blvd., Oakland, CA 94611

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