Loan refinance

[doombuggy]

I have never done a loan refinance in all the years I have done distributions. We have taken over a plan recently that allows for 2 loans at a time and this person has requested a new loan of $2500 plus his outstanding balance on loan #1, $1500. He has plenty of money in the account, so the limit is not an issue. My question has to do with the due date of the loan. Loan #1 is due 12/26/07. He is requesting 2 years on his new loan, and the date he wrote on the Handcock form is 12/26/09. He is adding that additional 2 years of the end of loan #1. Is that ok to do? My thoughts would be that the 2 year period has to start from now, not December. Loan #1 was taken out last December and was for a period of one year.

So what should the lenght of his loan be?

[masteff]

Final reg on loan refinancing: http://www.irs.gov/pub/irs-irbs/irb02-51.pdf

See page 7 of above document, Q&A-20. (Given what you said about plenty of money and both old and new being well below $50K limit...) As I see it, first you look at when the 5 years on the original loan would have expired (so if original was a 3-yr loan and it's extended to 5-yrs, then no problem; or if it's a 5-yr loan and new loan is paid off w/in that original 5-yrs then no problem). But it the new loan extends past the original 5-yrs then either a) for purposes of figuring the max loan amount available, have to include both the replaced and replacement loans as outstanding in the max loan calculation or b) have to re-amortize as two loans with original principal being paid w/in original 5-yrs and any excess being paid w/in new 5-yrs (see examples in reg).

Since you said loan #1 was taken Dec 2006 and revised loan date is Dec 2009, then revised loan is only 3-yrs from original loan date, so it will all be paid off w/in 5-yrs of the original loan, so no problem.

If this was truly a 2nd loan (versus a refinancing that includes the original balance), then as you ask, the 2-yr period would start from now. But since it's a refi, then you do the thought process above.