Are Mortgage Refinancing Fees Tax Deductible?

by Amanda McMullen

    Refinancing a mortgage often raises your tax bill. Because the new mortgage usually carries a lower interest rate, the refinance will reduce your mortgage interest tax deduction over the life of the loan. However, refinancing your mortgage also provides some tax benefits that can offset this loss. In fact, you can deduct many of the fees that you pay when you refinance the loan.

    If you refinance a mortgage, you will pay many of the same fees you paid to obtain your original loan. Typical costs include loan application fees, appraisal fees, attorney fees, title insurance and miscellaneous closing costs. You may also pay points at closing to reduce your interest rate. While some of these fees are deductible, others are not.

    Although you can deduct the full amount of points paid on a new home purchase in the year of the transaction, the IRS requires you to amortize the points you pay on a refinance over the life of the loan. For example, if you pay $6,000 in points at the closing of a 30-year refinance, you can deduct $200 each year for the next 30 years. If you refinance the same mortgage again, however, you can deduct all of the remaining points paid on the previous refinance in one year.

    You cannot deduct miscellaneous closing costs, such as title insurance, appraisal expenses or attorney fees. Money you pay to open a new escrow account is also non-deductible. However, if you pay any money directly toward real estate taxes at the closing of your refinance, you can deduct the amount you pay.

    Over the life of the loan, you can continue to deduct the interest you pay on the refinanced principal. However, if the balance of the new loan is greater than the balance of your previous loan, such as in a cash-out refinance, you must meet certain requirements to deduct the interest you pay on the excess amount. According to IRS regulations, you can deduct this excess interest if you use the proceeds from the mortgage to buy, build or improve a principal residence or second home. If the excess amount is less than $100,000 for married couples or $50,000 for single filers, you can deduct the interest regardless of how you use the loan's proceeds.

    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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