In year 1, Kris purchased a new home for $240,000 by making a down payment of $180,000 and financing the remaining $60,000 with a loan, secured by the residence, at 6 percent. As of January 1, year 4, the outstanding balance on the loan was $48,000. On January 1, year 4, when his home was worth $312,000, Kris refinanced the home by taking out a $156,000 mortgage at 5 percent. With the loan proceeds, he paid off the $48,000 balance of the existing mortgage and used the remainder for purposes unrelated to the home. During year 4, he made interest only payments on the new loan of $7,800. What amount of the $7,800 interest expense on the new loan can Kris deduct in year 4 on the new mortgage as home related interest expense?

$1,200.

$4,800.

$7,400.

$7,800.