What Can You Deduct on Your Income Tax When You Refinance Your Mortgage?

by Amanda McMullen

    Refinancing your home mortgage at a lower interest rate can save you a significant amount of money each month. However, you can also save some money on your taxes by deducting some of the costs you incur during the refinance. Deductible costs include mortgage interest, points and property taxes paid at closing.

    Mortgage Interest

    When you refinance your home mortgage on a first or second home, you can continue deducting your mortgage interest just as you did with your previous loan. You can deduct all mortgage interest you paid on the first $1 million of your home loan. You can also deduct interest paid on home equity or home improvement loans of up to $100,000.

    Points

    The Internal Revenue Service allows you to deduct any points you pay to lower your mortgage interest rate from your taxable income. However, when you refinance, you cannot deduct the full amount of the points in the year of the transaction. Instead, you must divide the points evenly over the loan's term. For example, if you paid $1,500 toward points on a 15-year loan, you can deduct $100 every year following the refinance.

    Property Taxes

    If you refinanced close to your property tax due date, you may have paid money toward property taxes at the closing of the loan. If so, you can deduct the amount you paid on your income tax return. However, you can only deduct property tax payments that you or the mortgage company actually made during the year. You cannot deduct money you paid into escrow for future property tax liability.

    Other Costs

    In most cases, you must also pay other miscellaneous closing costs when you refinance your home. These costs may include title fees, attorney fees, appraisal fees and other administrative expenses. You cannot deduct these fees from your taxable income. However, if your refinance included mortgage insurance, you can deduct the cost of the premiums. You can typically deduct mortgage insurance premiums paid at the closing of your refinance, as well as those you pay monthly.

    About the Author

    Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.

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