Can you write off interest you only accrue?

housefulOctober 18, 2005

I had a mortgage broker contact me about refinancing with a 1% only loan. Instead of paying interest only, you pay only 1% of the balance. His big selling point is more money in your pocket while keeping the interest tax write off. I asked him how I could write off the interest when I haven't paid any. He says you get a statement at the end of the year with all the interest you have accrued. Even though you haven't paid any, you can still write this off. Is this true?

Just to let you know, I have NOOOO intention of refinancing, I just want to know if he is telling the truth.

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joyfulguy

You pay only 1% of the *balance owing* each year?

Your payment is a repayment of part of the principal.

And the interest accrues.

What rate of interest are we talking about??

You don't mind having the amount that you end up owing increasing each year?

I'm a Canadian, so I don't know about the possibility of your being able to get away with claiming a tax deduction on interest that you hadn't paid ...

... yet, as of year end.

Did he give you any idea as to when they would expect you to actually pay the accrued interest?

ole joyful

    Bookmark   October 19, 2005 at 3:13PM
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gandbb

that sounds really goofy to me. Obviously there is something I am just not getting. I really don't think you can take an interest deduction for something you haven't actually paid.

    Bookmark   October 19, 2005 at 9:59PM
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quirk

ah, but you *have* actually "paid" it. You are paying for it on credit, by increasing the balance owed on your mortgage, instead of with cash, but you are paying for it all the same.

I'm not 100% positive, but my guess would be it's true. The deduction is for interest accrued on your mortgage debt, not on the payments you make to pay down your debt. The IRS doesn't normally care if you "pay" for deductible expenses with cash, credit, or what. In this case, you certainly are "paying" the interest, you are just paying it on credit (adding it to your mortgage balance) instead of paying it out of your bank account. All one and the same to the IRS. Smart guys. (While I'm not one to usually praise the IRS, in this case they're right. Money spent is money spent, using credit doesn't change that.)

Now, eventually, you would still have to actually start paying down your mortgage balance, and if it's true you get the tax deduction when the interest accrued, you wouldn't get it again when you actually do pay it. So at that point that you would be "paying" the mortgage company the back-accrued interest but *not* getting the deduction.

    Bookmark   October 20, 2005 at 7:12AM
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gandbb

Good explanation. I knew I wasn't understanding it

    Bookmark   October 20, 2005 at 10:12AM
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joyfulguy

I'm interested to learn what rate of interest is being charged.

Many people using credit cards seem to be concerned only with the (minimum) amount that they must pay monthly.

Very little concern that major credit cards' rate of interest often runs around 18%, while that on store-issued cards is often up around 28%.

Not my idea of a good time.

I recently received an offer from Citi Financial - which they've ben sending me about three times a year - offering me a loan of about $3,500.: maybe more, if I call right away!

When I call, they say that the rate varies, but usually around 30% annual rate.

I tell them that, as I'm not using it at the moment, and the central bank rate just went up, I'm not exactly sure what rate I'd have to pay were I to use my fully secured line of credit at the bank, but that ...

... it was 4.25%, last time that I asked, a few months ago.

They've agreed to remove my name from their mailing list.

Learning how money works is an interesting hobby - that pays well!!

ole joyful (20 years a personal financial advisor)

    Bookmark   October 20, 2005 at 2:26PM
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houseful

Great info. Thanks!

I know this is a bad idea all around and am perfectly happy with my 5.125 fixed mortgage, but I somehow enjoy "arguing" with this guy. He sent me a spreadsheet to review. I just want to make sure I am informed when he calls again. He has my number from several years back when we were doing some refinancing and calls periodically.

The initial interest rate is 6 something (margin plus indexed rate). Of course it is an ARM. What I didn't realize is that one would owe more than the original after one year. Yikes! My goal is to NOT have a mortgage passed age 60, LOL!

    Bookmark   October 21, 2005 at 11:23AM
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joyfulguy

Houseful,

It could cost you an ARM ...

... and a leg.

ole joyful

    Bookmark   October 21, 2005 at 2:10PM
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houseful

You're so right! I asked him (just out of curiosity) what the closing costs were, he said, "not much...about 2 to 4 thousand." When I said, "your kidding!" he said, "no, really." I said, "I mean 'you're kidding' as in THAT'S ALOT!" He didn't know what to say after that.

It's sort of like car shopping for me. I enjoyed pretending to play there game and then walking out when I wasn't safisfied. I am not easily persuaded to part with my money.

    Bookmark   October 21, 2005 at 2:40PM
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cowboyind

A lot of the "creative mortgages" like the type he is trying to sell are the way that mortgage companies can get people into houses that are way too expensive for them to afford. People get into these mortgages on the assumption that the house will continually go up in value. The thinking is that they can live there for four or five years, then sell the place and rake in a $50,000 profit that will more than erase all of the accrued interest.

The problem, of course, is that houses don't always go up in value, and even if they do, they may not go up in value fast enough to bail the person out of this mess. So, off to the bankruptcy court they go. Trouble is, that's no longer going to be as quick and painless as it was before the bankruptcy law changed 10/17/05.

No one needs to tell you this, but obviously it would be lunacy to get into a mortgage like this when you're aiming to pay your house off.

    Bookmark   October 23, 2005 at 1:54AM
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houseful

Yes, it is lunacy. Right now our LTV is only about 50% so even if our house doesn't continue to increase in value, we are doing fine.

    Bookmark   October 27, 2005 at 5:11PM
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lizql

Mine is totally paid off and they think I should pay for it again, LOL.

    Bookmark   November 30, 2005 at 1:55PM
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