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prepaid interest on mortgage

The unique ability to refinance a mortgage is causing interest rates to decline even faster, causing worries for investors.

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The term points is used to describe certain charges paid to obtain a home mortgage. Points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A, Itemized Deductions (PDF).If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage.

If the mortgage interest paid each year is reducing your tax obligation, then you may benefit more from investing your extra dollars in a vehicle that compounds interest to you until your compounded interest investment’s value reaches the balance due on your mortgage.

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Mortgage prepaid interest is usually collected at the time of closing the mortgage, and includes the amount of interest that will come due for the remainder of the month when the loan closes. For example, if a loan closes on 15 October, the lending agent will withhold the interest for 15 October through 31 October, which normally would be due.

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Mortgage interest payments cover an entire month, except for the very first and the very last payments which cover an odd number of days. Note: The above does not apply to simple interest mortgages and HELOCs, which accrue interest daily throughout their lives . Here is an example: Interest for month 1 is $600, or $20 a day.

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What is ‘prepaid interest’. prepaid interest is the interest that a debtor pays before the first scheduled debt repayment. For taxation purposes, most kinds of prepaid interest are expensed over the life of the loan. For mortgage loans, prepaid interest can also be the interim interest that accrues from the settlement day to the beginning of the first mortgage period.

If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person’s trade or business.