I am refinancing my 3 yr. arm mortgage & getting a fixed rate mortgage.?

Question

I am refinancing to a fixed rate mortgage from a 3 yr. ARM. I have $16,825.37 in unpaid deferred interest. A mortgage broker told me this amount can be used either as an income tax deduction or to add to the principle of my new mortgage. I don't understand the concept of this at all. I would like someone to explain this better.

Answer 1

Sounds like you are in an "option ARM" and have not been paying enough to cover the interest each month. If you have the cash available to pay the deferred interest, you should do just that. If not, by rolling it into the new loan you are now paying interest on your interest which is not a good situation. But if you have no choice, at leat you're getting into a fixed rate loan. Hopefully it is a fully amortizing loan and not interest-only.

Mortage interest is tax deductible and will be reported on a 1099 at the end of the year by your lender. However, since the interest you speak of is unpaid and added to the balance of your loan (which is basically an advance on your equity), I'm not sure it is reported as paid interest when you payoff the loan. Call the customer service department of your existing lender and ask if the $16,825 will be reported as interest at the end of the year and you will have your answer.

Answer 2

You should be able to use this amount as a deduction on your taxes. The $16,825 will have to be paid before you close out your old loan. The balance is usually rolled into the new loan raising that balance and charging interest on the interest.

The good news is that you will get a statement from that lender at the end of the year showing the total in interest that they've charged you. The $16,825 plus whatever you've actually paid into the interest on the loan so far this year will be included in that, and you can use it as a deduction.

Keep your settlement statement from the new loan as well. Some of those charges to get your new loan are deductions as well. Obviously this is a big bill to have to come up with and finance, but at least you'll get a bit of a break on next year's taxes.

Answer 3

Good for you! Switching to a fixed rate mortgage at a low rate is a good decision. Though you may pay more in the short term, in the long term you can laugh off changes in the interest rate and adjust your budget to pay down your mortgage faster if you like.

The 16K in unpaid interest will have to be paid one way or another. If you don't finance it you will have to pay out of pocket. If you ask your broker again, he will probably tell you what he said is that you can use it as a tax deduction (mortgage interest is still deductable I believe) AND put it in your new mortgage. However, if you can pay it in cash up front you will save yourself thousands of dollars over the length of your loan.

Make sure you shop the mortgage carefully. Watch out you dont' get pulled back into a bad loan. Even though there are fewer banks out there now lending, you can still find rate differences that may be to your advantage. If you're going to go for a fixed rate, peg it as low as you can.

Good luck!

Answer 4

You can't deduct interest that you haven't paid. But do you have to pay that amount as part of the closing on the new loan? If it's just deferred interest, then you'd have to pay it to close out the old loan - but then I'd think it would be a tax deduction AND be rolled into the principal of the new loan, not either/or. Be sure that you understand exactly what he's talking about before you get to closing, and before you sign anything.

Basically, sounds like your payments so far haven't even paid the interest that's accumulated, so you have to pay that now.

Answer 5

Whats the total amount of the loan
For example for a $300,000 loan
Its $1798 for a 30 year mortgage fixed at 6%

Forget about what he said about income tax
Just have them add the $16,825 to the unpaid balance
Can you afford that amount?