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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3346
Experience:  15+ years tax preparation and tax advice.
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I reduced my interest rate through a loan modification, as

Resolved Question:

I reduced my interest rate through a loan modification, as opposed to a refinancing, and am wondering whether the fees associated with such modification would be deductible either (i) in the year of the modification, (ii) over the life of the modified loan, or (iii) when I refinance the loan.

Also, I am considering refinancing my loan and instead of paying the refi fees up front, I accepted a slightly higher interest rate on the loan. To be clear, the fees were not rolled into the balance of the loan, but will rather result in more interest over the life of the loan. Are these fees deductible upfront, or do they just result in additional interest deductions over the term of the loan?
Submitted: 6 years ago.
Category: Tax
Expert:  Wendy Reed replied 6 years ago.

Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.

 

Hello there,

Loan modification fees for your primary residence are not deductible.

 

Refinance fees are not generally deductible, and amounts resulting in higher interest would not be deductible up front, but the additional interest is deductible over the term of the loan.

 

The only deductible type fees in these situations is if you pay "points" or "origination fees" that are expressed in a percentage of the loan amount---but they must be amortized over the life of the loan, or possibly, if you paid mortgage insurance premiums.

 

Please let me know if you need additional information.

Customer: replied 6 years ago.

Thanks for this; very helpful. A follow up question on the loan modification fees:

 

What is the difference between a loan modification fee to reduce my interest rate and paying "points" in connection with refinancing a loan? Since my loan would presumably deemed to be reissued for tax purposes as a result of the reduction of the interest rate by 500 bps, could this 1500 fee simply be viewed as a point on a refi?

 

 

Expert:  Wendy Reed replied 6 years ago.

There are multiple different types of fees that are thrown around as terms when discussing loan modification or refinance. There are lender fees, appraisal fees, title fees, legal fees, etc. Most of these are not deductible. However, the term points generally refers to prepaid interest--the purpose of which is to get a lower rate (I've never heard of points paid to get a higher rate).

 

Sometimes points can be known as "Loan origination fees" "maximum loan charges", "loan discount" or "discount points". The points are generally expressed as a percentage of the principal amount of the mortgage. For example, if the amount of the refinance (new loan), is $150,000, and to get a certain rate, you are paying 1 point (or 1% of the principal $1500) then that fee would be deductible---but since it is a refinance, it would have to be deducted ratably over the life of the loan.

 

For more specific and examples, see:

 

page 5: http://www.irs.gov/pub/irs-pdf/p936.pdf

Customer: replied 6 years ago.
Thanks, XXXXX XXXXX with respect to the fees rolled into the higher interest rate. But my follow up question was primarily focused on the loan modification fee that reduced my interest rate in the first instance and whether that woulld qualify as prepaying points that are recoverable over the life of the mortgage.
Expert:  Wendy Reed replied 6 years ago.
Is the fee expressed as one of the names that I have listed above? Is the amount of the fee expressed as a percentage of the loan balance?
Customer: replied 6 years ago.
Thanks for the response. It is not stated as points, but rather as a loan modification fee. Additionally, it was fixed at $1500.
Expert:  Wendy Reed replied 6 years ago.
A fixed fee such as this would be considered a nondeductible service fee.
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