Refinancing Mortgage Loan Costs - Are They Tax Deductible?

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Not only are your mortgage interest payments tax deductible, but so are your refinancing costs. Points can be deducted over the life of your loan. However, there are some restrictions with this program.

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Deducting Refinanced Points

When you originally take out a mortgage, you can deduct the points paid the year you take out the home loan. With refinancing, you have to deduct the points over the policy of the loan.

So take the point estimate paid and divide by the estimate of payments for the whole loan. A 30 year loan would have 360 payments. For each cost you make that year, you can deduct that estimate off your taxes.

If you cash out part of your equity, you can also deduct the points in full that year in unavoidable cases. For example, home improvements meet the Irs's requirements.

When you pay off your refinanced mortgage early, you can deduct the remaining point estimate from that year's taxes.

Restrictions to Be Aware Of When Deducting Refinance Costs

As with any Irs program, there are restrictions with deducting refinancing costs. For example, depending on your revenue level, there are restrictions on how much you can deduct.

Closing costs, such as attorney fees, notary fees, and Pmi, are also excluded. When the distributor pays the points, they cannot be deducted either.

Paying Points on Refinance Isn't all the time Best

Points are a typical highlight of today's mortgages, but don't plan on paying several points just for the tax write off.

Points are commonly paid to supplementary cut interest rates on a mortgage. If you are planning to keep the loan for several years, this can save you thousands and may be worth paying the upfront cost. However, if you plan to move in a few years or refinance again, you won't see a gain from paying the points.

The best thing to do is find the bottom costing loan first. Ask for Apr quotes from several lenders to find the optimal rates and fees. That step alone can save you thousands. Next, resolve if you can come out ahead by paying supplementary points. Remember that the tax deduction will only save you pennies on the dollar.

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