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TAX TIPS
Good News/Bad News for Refinancers
by Kevin McCormally

Did you refinance a home mortgage last year to take advantage of rock-bottom interest rates? Well, if you paid points on the loan, you need to know how the tax law treats that expense.

It's not the same as when you bought your home. When a purchase is involved, points are fully deductible in the year paid. Because each point equals 1% of the loan amount, paying two points on a $250,000 mortgage costs $5,000 ... and translates to an immediate $5,000 deduction.

When you refinance, though, the rules aren't so generous. Instead, you have to deduct the points over the life of the loan. That means 1/30th a year in the case of a 30-year loan -- or just $166 a year in the case of that $250,000, two-point deal.

But what happens if the loan you refinanced in 2003 was a loan you had refinanced earlier? Well, the general rule is that any points not yet deducted on the first refinancing can be deducted in the year the loan is paid off with the second refinancing. That's a real money saver for serial refinancers -- and I know there are a lot of you out there.

But notice I said that's the "general rule." There's an exception that might deny you that big write-off.

The IRS says that if you refinanced the loan with the same lender -- as homeowners often do to hold down costs -- then the points from the first refinancing are not suddenly deductible. Instead they are to be added to the points charged on the second refinancing and deducted over the life of that loan.

Why the discrimination against homeowners who refinance with the same lender? I don't know. Maybe you should ask your representatives in Congress who make the law.