Publication 936 - Home Mortgage Interest Deduction

ment, business, or other deductible purposes,

pending on how you used the proceeds. The

To figure your average balance, com-

the interest may be deductible. If it is, see the

plete the following worksheet.

balance on the mortgage before you borrowed

Table 1 Instructions for line 13 for an explanation

the additional amounts is grandfathered debt.

of how to allocate the excess interest.

The newly borrowed amounts are not

grandfathered debt because the funds were bor-

Part of home not a qualified home. To

figure the limit on your home equity debt, you

rowed after October 13, 1987. See Mixed-use

1. Enter the balance as of the first day

must divide the FMV of your home between the

mortgages under Average Mortgage Balance in

of the year that the mortgage was

part that is a qualified home and any part that is

the Table 1 Instructions that follow.

secured by your qualified home

not a qualified home. See Divided use of your

during the year (generally January

home under Qualified Home in Part I.

Table 1 Instructions

1) . . . . . . . . . . . . . . . . . . . . . .

Fair market value (FMV). This is the price

2. Enter the balance as of the last day

Unless you are subject to the overall limit on

at which the home would change hands be-

of the year that the mortgage was

itemized deductions, you can deduct all of the

secured by your qualified home

tween you and a buyer, neither having to sell or

interest you paid during the year on mortgages

during the year (generally

buy, and both having reasonable knowledge of

December 31) . . . . . . . . . . . . . .

all relevant facts. Sales of similar homes in your

secured by your main home or second home in

area, on about the same date your last debt was

either of the following two situations.

3. Add amounts on lines 1 and 2 . . .

secured by the home, may be helpful in figuring

4. Divide the amount on line 3 by 2.

the FMV.

1) All the mortgages are grandfathered debt.

Enter the result . . . . . . . . . . . . .

2) The total of the mortgage balances for the

Grandfathered Debt

entire year is within the limits discussed

Interest paid divided by interest rate method.

You can use this method if at all times in 2003

earlier under Home Acquisition Debt and

If you took out a mortgage on your home before

the mortgage was secured by your qualified

Home Equity Debt.

October 14, 1987, or you refinanced such a

home and the interest was paid at least monthly.

mortgage, it may qualify as grandfathered debt.

In either of those cases, you do not need Table

To qualify, it must have been secured by your

Complete the following worksheet to

1. Otherwise, you may use Table 1 to determine

qualified home on October 13, 1987, and at all

figure your average balance.

your qualified loan limit and deductible home

times after that date. How you used the pro-

mortgage interest.

ceeds does not matter.

Grandfathered debt is not limited. All of the

Fill out only one Table 1 for both your

interest you paid on grandfathered debt is fully

TIP

main and second home regardless of

deductible home mortgage interest. However,

how many mortgages you have.

1. Enter the interest paid in 2003. Do

the amount of your grandfathered debt reduces

not include points or any other

the $1 million limit for home acquisition debt and

interest paid in 2003 that is for a year

the limit based on your home’s fair market value

after 2003. However, do include

Home equity debt only. If all of your mort-

interest that is for 2003 but was paid

for home equity debt.

gages are home equity debt, do not fill in lines 1

in an earlier year . . . . . . . . . . . . .

Refinanced grandfathered debt. If you refi-

through 5. Enter zero on line 6 and complete the

2. Enter the annual interest rate on the

nanced grandfathered debt after October 13,

rest of Table 1.

mortgage. If the interest rate varied

1987, for an amount that was not more than the

in 2003, use the lowest rate for the

mortgage principal left on the debt, then you still

year . . . . . . . . . . . . . . . . . . . . . .

Average Mortgage Balance

treat it as grandfathered debt. To the extent the

3. Divide the amount on line 1 by the

new debt is more than that mortgage principal, it

amount on line 2. Enter the result . .

You have to figure the average balance of each

is treated as home acquisition or home equity

mortgage to determine your qualified loan limit.

debt, and the mortgage is a mixed-use mort-

Example. Mr. Blue had a line of credit se-

gage (discussed later under Average Mortgage

You need these amounts to complete lines 1, 2,

cured by his main home all year. He paid interest

Balance in the Table 1 Instructions). The debt

and 9 of Table 1. You can use the highest

of $2,500 on this loan. The interest rate on the

must be secured by the qualified home.

mortgage balances during the year, but you may

loan was 9% (.09) all year. His average balance

You treat grandfathered debt that was refi-

benefit most by using the average balances.

using this method is $27,778, figured as follows.

n an ce d a f t er Oc t o ber 1 3 , 1 9 8 7 , a s

The following are methods you can use to figure

grandfathered debt only for the term left on the

your average mortgage balances. However, if a

1. Enter the interest paid in 2003. Do

debt that was refinanced. After that, you treat it

mortgage has more than one category of debt,

not include points or any other

as home acquisition debt or home equity debt,

interest paid in 2003 that is for a

see Mixed-use mortgages, later, in this section.

depending on how you used the proceeds.

year after 2003. However, do

include interest that is for 2003 but

Exception. If the debt before refinancing

Average of first and last balance method.

was paid in an earlier year . . . . .

$2,500

was like a balloon note (the principal on the debt

You can use this method if all the following

2. Enter the annual interest rate on

was not amortized over the term of the debt),

apply.

the mortgage. If the interest rate

then you treat the refinanced debt as

varied in 2003, use the lowest rate

grandfathered debt for the term of the first refi-

for the year . . . . . . . . . . . . . . .

.09

1) You did not borrow any new amounts on

nancing. This term cannot be more than 30

3. Divide the amount on line 1 by the

the mortgage during the year. (This does

years.

amount on line 2. Enter the result

$27,778

not include borrowing the original mort-

Example. Chester took out a $200,000 first

gage amount.)

Statements provided by your lender. If you

mortgage on his home in 1985. The mortgage

2) You did not prepay more than one month’s

receive monthly statements showing the closing

was a five-year balloon note and the entire bal-

principal during the year. (This includes

balance or the average balance for the month,

ance on the note was due in 1990. Chester

prepayment by refinancing your home or

you can use either to figure your average bal-

refinanced the debt in 1990 with a new 20-year

ance for the year. You can treat the balance as

by applying proceeds from its sale.)

mortgage. The refinanced debt is treated as

zero for any month the mortgage was not se-

grandfathered debt for its entire term (20 years).

3) You had to make level payments at fixed

cured by your qualified home.

equal intervals on at least a semi-annual

Line-of-credit mortgage. If you had a

For each mortgage, figure your average bal-

basis. You treat your payments as level

line-of-credit mortgage on October 13, 1987,

ance by adding your monthly closing or average

even if they were adjusted from time to

and borrowed additional amounts against it after

balances and dividing that total by the number of

time because of changes in the interest

that date, then the additional amounts are either

months the home secured by that mortgage was

home acquisition debt or home equity debt de-

rate.

a qualified home during the year.

Page 10

Publication 936 - Home Mortgage Interest Deduction - 2003 Page 10

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