ded@milo.UUCP (Don E. Davis) (02/03/86)
There is something called the 3% rule which states that you should not refinance a mortgage unless the new rate is at least 3% below your current rate. Now that mortgage rates have apparently bottomed out (only 2% below my current rate) I did some calculations. Since refinancing will cost about $3000, and reduce my payment by $128, I figured it this way: The $3000 is a loss, so I calculated what I would have make if I invested the $3000 at 10.5%. The gain is $128, so I calculated what I would have if I invested $128 per month at 10.5%. The break-even point occurs after 2 1/2 years. It takes 2 1/2 years to make up the loss of the $3000 dollars. Thereafter, I save thousands of dollars. It seems to me that, as long as I keep the mortgage at least 2 1/2 years, this is a good deal. Am I missing something? Maybe we should rename it the 2% rule. Actually, maybe we just shouldn't have a rule. The criteria seems to be the cost of refinancing and how long you expect to keep the mortgage. If you plan to pay the mortgage to the bloody end, even a difference of only 1/2% might be worth your while, though I wouldn't recommend locking yourself in for an inordinate amount of time. But 2 1/2 years is perfectly reasonable. don davis
marcus@wanginst.UUCP (Bob Marcus) (02/06/86)
In article <182@milo.UUCP> ded@milo.UUCP (Don E. Davis) writes: > >Now that mortgage rates have apparently bottomed out (only 2% below >my current rate) I did some calculations. Since refinancing will >cost about $3000, and reduce my payment by $128, I figured it this way: >The $3000 is a loss, so I calculated what I would have make if I >invested the $3000 at 10.5%. >The gain is $128, so I calculated what I would have if I invested $128 >per month at 10.5%. The break-even point occurs after 2 1/2 years. >It seems to me that, as long as I keep the mortgage at least 2 1/2 years, >this is a good deal. Am I missing something? > don davis One important fact to consider is that there will be a month in which you make NO payment, as there was when you first took out your mortgage. That is effectively money in your pocket. -- Bob Marcus marcus@wanginst (Csnet) Wang Institute of Graduate Studies wanginst!marcus (UUCP) Tyng Road, Tyngsboro, MA 01879 (617) 649-9731
ark@alice.UucP (Andrew Koenig) (02/07/86)
> One important fact to consider is that there will be a month in which you make > NO payment, as there was when you first took out your mortgage. That is > effectively money in your pocket. No it isn't, unless you want to think of it as "borrowed money in your pocket." For instance, we just refinanced our house. The old mortgage had payments due on the first of each month. The new one has payments due on the fourth (the anniversary date of the loan). Thus we will make payments on Jan 1, Feb 1, March 4, April 4, and so on.
levy@ttrdc.UUCP (Daniel R. Levy) (02/09/86)
<Oh oh here it comes. Watch out boy, it'll chew you up! \ Oh oh here it comes. The LINE EATER! [Line eater]> (skip one page now if you don't want to see the quote) In article <182@milo.UUCP>, ded@milo.UUCP (Don E. Davis) writes: >There is something called the 3% rule which states that you >should not refinance a mortgage unless the new rate is at least >3% below your current rate. >Now that mortgage rates have apparently bottomed out (only 2% below >my current rate) I did some calculations. Since refinancing will >cost about $3000, and reduce my payment by $128, I figured it this way: >The $3000 is a loss, so I calculated what I would have make if I >invested the $3000 at 10.5%. >The gain is $128, so I calculated what I would have if I invested $128 >per month at 10.5%. The break-even point occurs after 2 1/2 years. >It takes 2 1/2 years to make up the loss of the $3000 dollars. Thereafter, >I save thousands of dollars. >It seems to me that, as long as I keep the mortgage at least 2 1/2 years, >this is a good deal. Am I missing something? Maybe we should rename >it the 2% rule. Actually, maybe we just shouldn't have a rule. The >criteria seems to be the cost of refinancing and how long you expect >to keep the mortgage. If you plan to pay the mortgage to the bloody end, >even a difference of only 1/2% might be worth your while, though I >wouldn't recommend locking yourself in for an inordinate amount of time. >But 2 1/2 years is perfectly reasonable. > don davis Don't forget to factor in the effect of tax deductions for interest. While they aren't usually enough to pay the interest itself (a slight understate- ment!) they will add to the 'break-even' time you cite. -- ------------------------------- Disclaimer: The views contained herein are | dan levy | yvel nad | my own and are not at all those of my em- | an engihacker @ | ployer or the administrator of any computer | at&t computer systems division | upon which I may hack. | skokie, illinois | -------------------------------- Path: ..!{akgua,homxb,ihnp4,ltuxa,mvuxa, vax135}!ttrdc!levy
rs55611@ihuxk.UUCP (Robert E. Schleicher) (02/11/86)
> >It seems to me that, as long as I keep the mortgage at least 2 1/2 years, > >this is a good deal. Am I missing something? Maybe we should rename > >it the 2% rule. Actually, maybe we just shouldn't have a rule. The > >criteria seems to be the cost of refinancing and how long you expect > >to keep the mortgage. If you plan to pay the mortgage to the bloody end, > >even a difference of only 1/2% might be worth your while, though I > >wouldn't recommend locking yourself in for an inordinate amount of time. > >But 2 1/2 years is perfectly reasonable. > > don davis > > Don't forget to factor in the effect of tax deductions for interest. While > they aren't usually enough to pay the interest itself (a slight understate- > ment!) they will add to the 'break-even' time you cite. > -- > ------------------------------- Disclaimer: The views contained herein are The tax effects are more subtle than alluded to above. The refinancing points are deductible in the present year ($3000 in example above), while the reduced monthly payment lowers deductions by $128 per month. The net effect is not great, but taking the bigger deduction now, and having lower deductions later, actually moves the "break-even" date up (sooner), barring your tax rate going to a much higher percentage in the next couple of years. The tax effect probably only moves the break-even point a month or two, in most situations. Bob Schleicher ihuxk!rs55611 > | dan levy | yvel nad | my own and are not at all those of my em- > | an engihacker @ | ployer or the administrator of any computer > | at&t computer systems division | upon which I may hack. > | skokie, illinois | > -------------------------------- Path: ..!{akgua,homxb,ihnp4,ltuxa,mvuxa, > vax135}!ttrdc!levy *** REPLACE THIS LINE WITH YOUR MESSAGE ***
halle@hou2b.UUCP (J.HALLE) (02/12/86)
Contrary to statements made by others, points paid for REFINANCING are not deductable all at once, but must be amortized over the life of the loan. The IRS is very specific about this point. See Publication 19 among others. Thus it might pay to get a slightly higher rate in lieu of points. Or deduct it anyway and assume they won't find out.
jdt@houxj.UUCP (J.TAIS) (02/12/86)
Someone writes: > Contrary to statements made by others, points paid for REFINANCING are > not deductable all at once, but must be amortized over the life of the > loan. The IRS is very specific about this point. See Publication 19 > among others. Thus it might pay to get a slightly higher rate in lieu > of points. Or deduct it anyway and assume they won't find out. Wrong. A few days ago I posted the following to net.taxes; clearly it needs to be posted here too: Another misinformed person in net.taxes writes: > This used to be true, but is no longer. Your friend and mine, > the IRS, has added a note in the instructions explaining that > these points are interest, but must be deducted over the > life of the loan, which for a house is typically 30 years. According to the rules, "You may deduct the amount you pay as points in the year of payment if the loan is used to buy or improve your principal home and is secured by that home. This exception will only apply if-- 1. The payment of points is an established business practice in the area where the loan was made, and 2. The points paid did not exceed the number of points generally charged in this area." "Your Federal Income Tax", IRS, pp. 128. BUT if you don't qualify for this exception you have to spread the points out over the life of the loan. Say, if you had a vacation home. I assume rental property points would always qualify for deduction on the basis of "expense of producing income." Order IRS publication #17, "Your Federal Income Tax". It's free. John Tais, AT&T Information Systems, Holmdel NJ 07733 ihnp4!houxj!jdt (201) 949-4799 HO 2J-236
halle@hou2b.UUCP (J.HALLE) (02/12/86)
I repeat. The points must be amortized. And I will use your own words to show this. >According to the rules, >"You may deduct the amount you pay as points in the year of payment if the >loan is used to buy or improve your principal home and is secured by that >home. >This exception will only apply if-- >1. The payment of points is an established business practice in the area where >the loan was made, and >2. The points paid did not exceed the number of points generally charged in >this area." Refinancing is not included in this exception. You are not buying your home. You are not using the loan to improve your home. Even if some of the proceeds are used for home improvement, and there probably won't be that much if you are considering a refinance to lower interest, only the proportion so used could be expensed. The purpose of the loan is lowered payments not home improvement. Thus the exception cannot apply, even if the last two criteria are satisfied. Except for rare cases, only a second mortgage might apply. However, I'd deduct it anyway, even though I knew it was wrong. I'd put this violation in the same category as taking out a loan to buy tax frees. How are they going to know exactly what you did? There is no obvious flag. Even an audit would probably ignore it. Play it safe. Get the first year interest raised to reduce your points to zero.
ded@milo.UUCP (Don E. Davis) (02/13/86)
In article <4948@alice.uUCp> ark@alice.UUCP writes: >> One fact to consider is that there will be a month in which you make >> NO payment, as there was when you first took out your mortgage. That is >> effectively money in your pocket. > >No it isn't, unless you want to think of it as "borrowed money in your pocket." >For instance, we just refinanced our house. The old mortgage had >payments due on the first of each month. The new one has payments >due on the fourth (the anniversary date of the loan). Thus we will >make payments on Jan 1, Feb 1, March 4, April 4, and so on. I'm confused. I thought mortgage payments were for the previous month. So Jan 1 would cover December, Feb 1 would cover January, and so on. If you refinanced your house on say, Feb 15, at that time you would pay interest for the rest of the month (or until March 4 in your case). Then the next payment wouldn't be due until April 4, and it would cover interest from March 4 to April 4. On April 4 an all too small amount would be deducted from your principal, and interest would begin accruing on that new amount. That's the way it works around here anyway. Who floated your mortgage, the Mafia? If not, recheck your paperwork; you may be in for a pleasant surprise.
lab@rochester.UUCP (Lab Manager) (02/13/86)
In article <1067@ihuxk.UUCP> rs55611@ihuxk.UUCP (Robert E. Schleicher) writes: >> >It seems to me that, as long as I keep the mortgage at least 2 1/2 years, >> >this is a good deal. Am I missing something? Maybe we should rename >The tax effects are more subtle than alluded to above. The refinancing >points are deductible in the present year ($3000 in example above), >Bob Schleicher >ihuxk!rs55611 > I don't beleive this is correct. I think points are deductible only if they are used to purchase something 'new' - i.e. not for refinancing. Best check your tax code and be sure before you refinance (otherwise, the points are deducted over the lifetime of the loan). -- Brad Miller ARPA: miller@rochester.arpa UUCP:rochester!miller (also lab@rochester for lab manager stuff) Title: CS Grad Student Snail: University of Rochester Computer Science Department 617 Hylan Building Rochster, NY 14627
ark@alice.UucP (Andrew Koenig) (02/16/86)
> I'm confused. I thought mortgage payments were for the previous month. So Jan 1 > would cover December, Feb 1 would cover January, and so on. If you > refinanced your house on say, Feb 15, at that time you would pay > interest for the rest of the month (or until March 4 in your case). Then > the next payment wouldn't be due until April 4, and it would cover interest > from March 4 to April 4. On April 4 an all too small amount would be deducted > from your principal, and interest would begin accruing on that new amount. > That's the way it works around here anyway. Who floated your > mortgage, the Mafia? If not, recheck your paperwork; you may be in > for a pleasant surprise. No, it depends on the details. Some lenders want all payments due on the first of the month, so if your loan starts in the middle of the month then you pay the interest until the end of that month in advance. For example, when we first bought the house, we closed on January 6. At the closing, therefore, we had to pay in advance the interest on the loan from January 6 to January 31. There was then no mortgage payment at all due on February 1; the first actual payment was March 1 and the last payment would have been due February 1, 29 years and 11 months later. When we refinanced, we got the loan approved on February 4 and picked up the check February 10. Therefore, in effect we made the normal mortgage payment on February 1, then on February 11 we paid off the remaining principal plus interest from February 1 to February 11. Our first payment on the new mortgage will be due March 4, and will include interest from February 10 through March 4, plus some principal. Note my hedging "in effect." Since mortgage payments on the old loan weren't late until the 16th, we actually sent them a single check to cover the mortgage payment that was due February 1 plus the rest of it. The effect is the same, however, as if we had made mortgage payments on January 1, February 1, and March 4. Believe me, I have indeed checked the paperwork.
king@kestrel.ARPA (Dick King) (02/17/86)
From: lab@rochester.UUCP (Lab Manager) Newsgroups: net.invest Date: 13 Feb 86 16:49:13 GMT Reply-To: lab@seneca.UUCP (Lab Manager(Brad Miller)) In article <1067@ihuxk.UUCP> rs55611@ihuxk.UUCP (Robert E. Schleicher) writes: >> >It seems to me that, as long as I keep the mortgage at least 2 1/2 years, >> >this is a good deal. Am I missing something? Maybe we should rename >The tax effects are more subtle than alluded to above. The refinancing >points are deductible in the present year ($3000 in example above), >Bob Schleicher >ihuxk!rs55611 > I don't beleive this is correct. I think points are deductible only if they are used to purchase something 'new' - i.e. not for refinancing. Best check your tax code and be sure before you refinance (otherwise, the points are deducted over the lifetime of the loan). If the points are deductible over the life of the loan, can you take all of the deduction you have not yet taken if you pay off the loan early? Is the deduction proportional to interest paid (which is greater in earlier parts of the loan) or in equal annual installments?
stevev@tekchips.UUCP (Steve Vegdahl) (02/19/86)
> >> One fact to consider is that there will be a month in which you make > >> NO payment, as there was when you first took out your mortgage. That is > >> effectively money in your pocket. > > > > >No it isn't, unless you want to think of it as "borrowed money in your pocket." > >For instance, we just refinanced our house. The old mortgage had > >payments due on the first of each month. The new one has payments > >due on the fourth (the anniversary date of the loan). Thus we will > >make payments on Jan 1, Feb 1, March 4, April 4, and so on. > > I'm confused. I thought mortgage payments were for the previous month. So Jan 1 > would cover December, Feb 1 would cover January, and so on. If you > refinanced your house on say, Feb 15, at that time you would pay > interest for the rest of the month (or until March 4 in your case). Then > the next payment wouldn't be due until April 4, and it would cover interest > from March 4 to April 4. On April 4 an all too small amount would be deducted > from your principal, and interest would begin accruing on that new amount. > That's the way it works around here anyway. Who floated your > mortgage, the Mafia? If not, recheck your paperwork; you may be in > for a pleasant surprise. When we refinanced our mortgage this past year, both the exisiting and new mortgages had due dates on the first of the month. There was indeed a month in which we had no mortgage payment. HOWEVER, the interest for that month was paid as part of closing. The closing took place on the 12th of the month. There was a line item on statement for interest from the 1st through the 12th of the month to be paid to the holders of the existing mortgage. Furthermore, there was a line item that included a payment to the new mortgage holders for interest from the 12th of the month through the 31st. The net effect was that we paid for a full month's interest at closing; I believe that we actually paid for interest to both parties for the closing date. Thus, no free lunch. Steve Vegdahl Computer Research Lab. Tektronix, Inc. Beaverton, Oregon