Quick tax question - refinanced home - prepaid interest at closing

[Jeninindy]

We refi'd in May. At closing there was $254.xx in prepaid interest paid.. Do I add that as interest paid on the loan during 2009 or is that automatically added by the mortgage company on the statement they sent us?

 

[msmayor]

Depends.

What you need to do is reconcile the interest paid that is shown on your monthly statements to the interest paid shown on the year-end statement. It may or may not be included; you have to check.

We refinanced as well, but our mortgage company did NOT report that prepaid interest. In fact, we received a separate statement from the mortgage broker that arranged and closed the loan with the interest prepaid at settlement amount.

 

[Cheshire Figment]

Normally they will report the interest on the 1098.

Basically every month's payment includes the interest for the previous month plus an amount of principal (plus escrow amounts). Let's say your closing date was May 20. You had no June 1 payment but your July 1 payment included all interest for June. So what you paid at closing was the interest from May 20 through May 31.

 

[seashoreCM]

We refi'd in May. At closing there was $254.xx in prepaid interest paid.. Do I add that as interest paid on the loan during 2009 or is that automatically added by the mortgage company on the statement they sent us?

Here you may deduct this prepaid interest in the year you closed (which is when you paid that interest).

However if the amount of prepaid interest is large and covers a large period of time (not just the remainder of the month after closing day) then you would have to hold off on deducting the portion of interest spanning days in the next year until said next year. Example: prepaying all of the interest expected to be computed over the year 2010 on December 31, 2009. Actually the bank's computers that handle mortgage loans won't let you do that but will instead apply the overpayment to principal.