RealTown Words

The paying of interest before it is due. Prior to 1975, the prepayment of interest was a tax-saving technique because the IRS allowed a taxpayer to deduct the prepayment of interest under certain circumstances. The Internal Revenue Code, however, now provides that interest cannot be deducted as prepaid but must be deducted over the life of the loan when and as earned. Mortgage service points are also subject to the prepayment rules. However, mortgage service points paid in connection with the financing of a principal residence may be deducted in the year paid, if payment of points is an established business practice in the area, and if the amount paid does not exceed the amount generally charged in the area.