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Loan refinance on 10 year home loan

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I'm finding one aspect of this a bit confusing, and I've been chasing my tail a bit.

Original loan to purchase a home had a 10 year term. 6 years has gone by, and participant now wants to refinance, (plan doesn't allow multiple loans, and won't be amended to allow multiple loans) taking out additional cash, NOT to purchase the home. The question is - is the loan amortization period eligible for 5 years without falling afoul of the "double counting" - or, must the amortization period end no later than the end of the original 10-year period - that is, over the remaining 4 years?  I incline toward the latter...

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Theoretically, a refinanced loan can have a full 5-year term, but under Treas. Reg. 1.72(p)-1, Q&A-20 the $50k limit is going to be reduced by the highest outstanding balance of the old loan in the prior year. More daunting still, you would need to add the outstanding amount of the old loan at the date the new loan is taken out to the amount of the new loan and test that against the reduced $50k limit. The reg implies that if the replacement loan is for the same period as is left on the refinanced loan (so here, 4 years) then you would not need to add together the amounts of the refinanced and replacement loans in determining whether you were under the $50k limit as reduced by the highest outstanding balance in previous 12 months.

The same reg explains that if the refinanced loan is designed so that the payments during an initial period of the refinanced loan equal to the remaining period of the replaced loan (so here, 4 years) are equal to the sum of the amount needed to pay off the replaced loan plus the amount needed to amortize the excess of the replacement loan over the refinanced loan over its maximum term (here, 5 years), and the payments during the remaining period of the replacement loan (here, 1 year) continue for that period in the amount necessary to amortize the remaining balance of the excess of the replacement loan over the refinanced loan, then you're OK.

The reg is not a masterpiece of clarity, nor is my explanation above, unfortunately.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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