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Refinance Mortgage To Buy Second Home

In some cases, you may even have to refinance to reduce your current mortgage payment to qualify for the new loan. Or you may need to cash out funds from the refinance to come up with the down payment on the new property.

refinance mortgage to buy second home

Additionally, most refinances have a clause stating the borrower must stay in the home for at least one year. This means you cannot refinance a primary residence, close on a second home, and then immediately move into it permanently.

When applying for your second mortgage, your lender will take into account how you plan on using the property. So it makes a difference if the second home is for investment purposes or is a vacation home for personal use.

Mortgages you (or your spouse if married filing a joint return) took out after October 13, 1987, and prior to December 16, 2017 (see binding contract exception below), to buy, build, or substantially improve your home (called home acquisition debt), but only if throughout 2022 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).

Mortgages you (or your spouse if married filing a joint return) took out after December 15, 2017, to buy, build, or substantially improve your home (called home acquisition debt), but only if throughout 2022 these mortgages plus any grandfathered debt totaled $750,000 or less ($375,000 or less if married filing separately).

Were all of your home mortgages taken out after October 13, 1987, used to buy, build or substantially improve the main home secured by that main home mortgage or used to buy, build or improve the second home secured by that second home mortgage, or both?

Beth owns a home subject to a mortgage of $40,000. She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Beth continues to make the payments on the $40,000 note. John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Beth doesn't record or otherwise perfect the $90,000 mortgage under the state law that applies. Therefore, the mortgage isn't a secured debt and John can't deduct any of the interest he pays on it as home mortgage interest.

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

If you have a second home and rent it out part of the year, you must also use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you don't use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Pub. 527.

If you have more than one second home, you can treat only one as the qualified second home during any year. However, you can change the home you treat as a second home during the year in the following situations.

If you have an office in your home that you use in your business, see Pub. 587, Business Use of Your Home. It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest.

You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication.

If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. See Second home rented out, earlier, for the use requirement. To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it.

If you're married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. However, if you both consent in writing, then one spouse can take both the main home and a second home into account.

If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty isn't for a specific service performed or cost incurred in connection with your mortgage loan.

John and Peggy Harris sold their home on May 7. Through April 30, they made home mortgage interest payments of $1,220. The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. Their mortgage interest deduction is $1,270 ($1,220 + $50).

If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, there is an exception that applies to points, discussed later.

If you're a minister or a member of the uniformed services and receive a housing allowance that isn't taxable, you can still deduct your home mortgage interest. For more information, see Pub. 3 (military) or Pub. 517 (ministers).

The Homeowner Assistance Fund program (HAF) was established to provide financial assistance to eligible homeowners for purposes of paying certain expenses related to their principal residence to prevent mortgage delinquencies, defaults, foreclosures, loss of utilities or home energy services, and also displacements of homeowners experiencing financial hardship after January 21, 2020. If you are a homeowner who received assistance under the HAF, the payments from the HAF program are not considered income to you and you cannot take a deduction or credit for expenditures paid from the HAF program.

If a qualified pre-2019 divorce or separation agreement requires you to pay home mortgage interest on a home owned by your spouse or former spouse or by both of you, the payment of interest may be alimony. See the discussion of Payments for jointly owned home under Alimony in Pub. 504, Divorced or Separated Individuals.

If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. This is true even if the settlement papers call them interest. You can't deduct these payments as home mortgage interest.

You generally can't deduct the full amount of points in the year paid. Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. See Deduction Allowed Ratably next. If the loan is a home equity, line of credit, or credit card loan and the proceeds from the loan are not used to buy, build, or substantially improve the home, the points are not deductible.

You use the cash method of accounting. In 2022, you took out a $100,000 home mortgage loan payable over 20 years. The terms of the loan are the same as for other 20-year loans offered in your area. You paid $4,800 in points. You made 3 monthly payments on the loan in 2022. You can deduct $60 [($4,800 240 months) x 3 payments] in 2022. In 2023, if you make all twelve payments, you will be able to deduct $240 ($20 x 12).

In 1999, Bill Fields got a mortgage to buy a home. In 2022, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. The mortgage is secured by his home. To get the new loan, he had to pay three points ($3,000). Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that are ordinarily stated separately on the settlement statement. Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. The payment of points is an established practice in the area, and the points charged aren't more than the amount generally charged there. Bill's first payment on the new loan was due July 1. He made six payments on the loan in 2022 and is a cash basis taxpayer.

Bill used the funds from the new mortgage to repay his existing mortgage. Although the new mortgage loan was for Bill's continued ownership of his main home, it wasn't for the purchase or substantial improvement of that home. He can't deduct all of the points in 2022. He can deduct two points ($2,000) ratably over the life of the loan. He deducts $67 [($2,000 180 months) 6 payments] of the points in 2022. The other point ($1,000) was a fee for services and isn't deductible.

The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to substantially improve his home and $75,000 to repay his existing mortgage. Bill deducts 25% ($25,000 $100,000) of the points ($2,000) in 2022. His deduction is $500 ($2,000 25% (0.25)).

When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Of the $1,000 charged for points, you can deduct $750 in the year paid. You spread the remaining $250 over the life of the mortgage.

The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). You spread the remaining $250 over the life of the mortgage. You must reduce the basis of your home by the $1,000 paid by the seller.

If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you can't deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan. 041b061a72


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