Question by rufbam@sbcglobal.net: I am refinancing my 3 yr. arm mortgage & getting a fixed rate mortgage.?
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.
Best answer:
Answer by Joseph G
If the interest in deferred, that means you wouldn’t have needed to pay it yet. How you could write that off your taxes without paying it is a mystery to me.
Now, with my ARM, I only paid interest, no principle. So I’m a bit lost on your situation. We may have different kinds of ARMs.
Anyway, what they would do is take the part of the debt you havn’t been paying (in your case, the interest I guess) and dump it into the new loan (the note) you are getting.
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The “unpaid deferred interest” accumulated as part of your 3 yr ARM. There must’ve been some provision where the interest was charged but not required to be paid off right away, making your monthly payment more affordable. Now, as you’re closing out that loan, the interest needs to be paid off. Guess, if your house had appreciated enough, it would’ve covered the amount in a refi. But that’s not the case here.
So there are three things you could do:
1) Pay the entire amount of interest. That amount paid will then be found on your Form 1098 at the end of the year as paid mortgage interest, which you can deduct from your federal income taxes. I highly doubt you have almost $ 17k lying around that you can use to pay off the interest now. If you do, though, then it would be best to apply it now.
2) Roll the entire interest owed amount into your new mortgage. That will increase your principal, meaning you’ll be paying it down over the life of the loan, but at least you don’t have to pay it right now.
3) Pay part of that interest now, and roll over the remaining amount into the principal of the loan. It’s a little of 1) and 2). And you’ll have to figure out what amount you can afford to pay right now w/o finding yourself in a cashflow bind later on.
Good luck.