Refinance your mortgage today – and reap the tax benefits!

Interest rates on 30-year fixed mortgages are at their lowest levels since the 50’s! Currently they are at 5.0%, or lower! Therefore, if your rate is 6% or higher this is the best time to refinance. Rates may not stay this low for very long!

To refinance your loan, you may have to overcome several hurdles:

• You’ll need to show your home’s value is high enough to provide the lender with adequate security. This generally means a loan-to-value ratio (LTV) of 80% or lower. 90% Loans are available, but require Mortgage Insurance. Lower LTV’s often mean more favorable loan terms.
• You’ll also need to prove your income is sufficient to carry your debt. This means the ratio of your monthly debt to your gross monthly income should not exceed 38 to 45%. You’ll need to provide the most recent 30 days pay stubs (showing year-to-date income), and 2008 W-2. For self employed borrowers, the last two years tax returns will need to show enough qualifying income - no stated income loans!
• Finally, it’s important to have good credit. A FICO score of 680 or better will help you to obtain the best loan terms. The higher the score the better.

To provide a “net tangible benefit”, you’ll want the monthly savings of the refinance to repay the cost of the refinance within the next 12 to 18 months. Generally, that means that the monthly savings should be at least $150.00, per month. However, depending on how long you expect to live in your home and whether or not you’re getting cash-out, there may be other benefits for refinancing too! Finally, bear in mind that lending standards are still tight. You'll need a good credit score and at least 10% equity in your home to qualify. Use the experience of a well respected Mortgage Broker, like R.B. Financial Services to get the best rates and terms for your new loan - (541) 548-6860.

Tax tactics

Assuming you qualify to refinance your home mortgage, you’ll want to make sure you maximize all the available tax benefits. Keep in mind, points are only deductible on the purchase of your primary residence. If you're refinancing, they are deductible over the life of the loan. There may be a benefit on a refinance to paying a slightly higher rate, say 1/8% to 1/4% higher and pay 0 points. As a wholesale lender we can arrange this for you.

Also, several recent tax changes affect the 1st time buyer. For example, the $8,000 tax credit is available for the 1st time home buyers (those who haven't owned a home for the past 3 years), who purchase a home, prior to 12/1/2009. You don't have to pay this back! You may even be able to amend your 2008 return and get the $8,000 this year! Some states even have down payment assistance programs that allow you to borrow these funds now.

If you’re not a first time buyer, the simplest way to save is to refinance your existing home loan through a “no cash-out” or “streamline” refinance. This means paying off just what you owe with a new, lower rate loan. Again rates are the lowest in nearly 40 years!

Example 1:
Pat Brown has a 6.5% mortgage with a balance of $250,000. He refinances with a 5% $250,000 mortgage. Pat’s mortgage interest on the new loan (about $12,500 per year) will be tax deductible, as long as the total of his home loans is $1 million or less. His new payment would be $238 lower, per month. However, the situation is a little trickier if you refinance with a larger loan, i.e. a “cash-out” refinance.

Example 2:
Richard and Sara Miller refinance a mortgage with a $250,000 balance. Their new loan is $300,000. After paying off their old loan, the Millers keep $50,000 in cash. They spend $20,000 to install an extra room in their home and use the other $30,000 to pay college tuition for their son, Bob.

Under the tax code, the $250,000 the Millers use to replace their old mortgage and the $20,000 they spend on the improvements is all considered “home acquisition debt”. The interest on the $270,000 will be tax deductible (as long as their home loans are not larger than $1 million). However, the $30,000 used for Bob’s schooling is “home equity debt”. The Millers can deduct the interest on no more than $100,000 of such debt. Therefore they could still have a home equity line of credit (HELOC) for up to $70,000 and still deduct the interest. Also, for the interest on the home equity debt to be fully deductible, the total mortgage debt on their home cannot exceed the home’s value. The total mortgage debt includes all acquisition debt and all home equity debt. Remember, lenders refinancing will generally limit the total CLTV (combined loan-to-value ratio) to 80%.

These are just a couple examples of tax tactics in refinancing your home. As each person's tax situation is a little different, please consult your CPA for additional details. Also, please feel free to call us for a current analysis of your refinancing needs. We are always available to assist you, especially if we can help you lower your monthly house payment and save you money! Thank you for your interest and please feel free to call us. Robert "Bob" Browne, CEO for R.B. Financial Services, Inc. (541) 548-6860.