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To obtain a mortgage of any size, you must typically pay loan origination fees. These fees can be quite expensive, especially if you pay points to lower your interest rate. To help with the cost of home ownership, the Internal Revenue Service allows homeowners to deduct certain loan origination fees from their taxable income.
About Origination Fees
The term "origination fees" refers to any expenses you pay to the lender to compensate him for providing the loan. Most lenders charge a basic origination fee equal to a certain percentage of the loan balance. Lenders may also include points in their origination fee, which are one-time prepaid interest payments you make in exchange for a lower annual rate. In most cases, you must pay these costs at settlement.
According to IRS Publication 530, you can deduct the full cost of any loan origination fees or points you pay to obtain a new home loan, as long as the fees meet certain criteria. Your fees are typically deductible if the lender calculates them as a percentage of your loan, the loan is secured by your main home and you paid them at closing. You cannot deduct any fees that the lender didn't list on the HUD Settlement Statement as fees charged for the mortgage.
If you are obtaining a mortgage to purchase a new home, the origination fees you pay are fully deductible in the year that you pay them. However, if your mortgage was a refinance loan, you must typically spread the deductions over the life of the loan. For example, if your origination fees equal $4,500 for a 30-year loan, you can deduct $150 each year for the next 30 years. If you refinance the loan again, you can deduct the remainder of the fees you paid on the previous refinance all at once in the year you paid off the loan, but you must spread origination fees from the new refinance over the loan's term.
Unlike loan origination fees, most other fees you pay at the closing of a mortgage loan are nondeductible. Nondeductible closing expenses include appraisal fees, title insurance and attorney fees. However, you can deduct any prepaid interest you pay at closing. You can also deduct the cost of prorated property taxes you pay to reimburse the seller for property taxes they had already paid on the home.
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