I received a very welcome email from my main man Grant Folske CPA telling me that I will be getting a refund from the IRS this year! One of the things that popped out at me that I had always been curious about was the fact that I had refinanced my own residence in 2009, and I paid off an Option Pay ARM. The particular loan product I had was called a “Fixed rate Option ARM”, in which the options are based on a fixed rate of 6% for the first 5 years. It was set up with 3 options:
- pay my balance at 6% ($2,400 with principal reduction)
- pay my balance at 6% Interest only ($1,900 with NO principal reduction)
- pay 55% of the first option ($1,320 which ADDS the difference between the Int only payment to the balance)
So I was on this program for about 3 years and change, every month paying the minimum option, and every month adding about $600 to my mortgage balance. Every year I got my 1098 Mortgage interest statement for the 1320 x 12 months and deducted it against my income. But over time, my loan balance increased by about $20,000 of DEFERRED INTEREST. So when rates moved lower as we all know they have in recent months, I re-assessed my strategy and locked in a fully amortizing note on the entire balance. In doing this, the deferred balance of mortgage interest was collected by my lender, thus creating an added $20,000.00 interest write off for myself this year.
So if you ever wanted to know how you get credit for the interest on an Option pay ARM, this is how it works.
If YOU are in an Option Pay ARM presently, and would like to look at refinancing out of it, I would be happy to do some analysis with you and determine if its the right move.