Should you refinance? What if you owe the IRS tax debt?
What is a Refinance (Refi)?
When you refinance your home, you are getting a new mortgage to pay off your existing mortgage.
Why Refinance Your Home?
Since getting a new mortgage takes time and there is often a monetary cost, why refinance your home? One common reason is that your current mortgage has a relatively high interest rate and today’s interest rates are lower. By taking advantage of a lower rate, you can get the same size loan for lower monthly payments. The typical advice is that if you can get a rate at least one percentage point lower than your current rate, a refinance may be worth pursuing.
In addition to the savings from those lower monthly mortgage payments, you also need to consider the costs to refinance your home. Mortgages cost money, so a new loan is only worth your while if you would pay less in fees than you would save on the payments. A typical rule of thumb to compute the break-even point on a mortgage refinance is to divide the total loan costs by the monthly savings. So if your refinancing fees total $2,000 and you save $100 a month, divide 2,000 by 100 and you get 20. That means it will take 20 months to recoup the cost of refinancing. That computes the pay-back period, not the internal rate of return.
However when looking at the refinancing costs the lender charges, don’t overlook the additional interest you may have to pay. If your current mortgage term has 15 years remaining, and you replace it with a 20-year mortgage, that is an additional 5 years of interest you will be paying and need to consider when computing your break even point. As you approach the halfway point of the existing mortgage, the principal portion of your payments may begin to exceed the interest portion.
Another major consideration is how long do you plan to live in your current home. While that may be somewhat unpredictable, you need to evaluate health considerations, children moving out of the house, and employment security to name a few points to ponder.
What If You Have IRS Debt?
If you owe the IRS and need funds to make the down payment for an offer in compromise or wish to reduce your IRS debt to obtain a more favorable IRS tax resolution option, refinancing your home may be a viable option to obtain those funds. Don’t forget that the equity in your home is an asset. The IRS definitely considers the equity in your home an asset.
There may also be a situation where you are asking for a resolution from the IRS to settle your debt, and the IRS will not agree to it unless you withdraw equity from your home to first pay down your IRS debt. In many situations, a person with IRS tax debt doesn’t have a good credit rating and lenders refuse to provide them with the refinancing, HELOC, etc. This presents a problem because the IRS wants to get its hands on it. What can you do? You need to make an application with at least three (3) lenders to access the equity in your home. If your credit is bad, the lenders will likely deny your request. You need to get those denials in writing and provide them to the IRS. This should satisfy the IRS that you cannot access the equity in your home.
Tip #1
Check your credit score with all three of the major credit bureaus. The lower your credit score, the higher rate of interest you will be required to pay. It may be worthwhile to research how you can improve your credit score before applying.
Tip #2
Depending upon the amount of the mortgage, you may have to pay a higher rate of interest if you applying for a jumbo loan. Keep in mind that an additional cost could be private mortgage insurance if there is insufficient equity in your home.
Tip #3
If you plan to refinance to take money out of the equity of your home, consider a Home Equity Line of Credit (HELOC). The costs to obtain a HELOC are substantially less than the cost of a refinance.
Tip #4
Consider refinancing your home to obtain a shorter mortgage term. If you currently have a 30-year mortgage, consider a refi where you obtain a lesser term loan, such as a 15-year term. The shorter term will increase your monthly payment, but your interest rate will be lower, meaning you’ll pay less interest over time.
Tip #5
When contemplating a refi, get advice from a financial and tax professional to make sure a refi is in your best interests. And since mortgages come with so many provisions, be sure to get all the details from the mortgage provider before signing on the dotted line.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.
About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.
