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.
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 course of the loan.
So take the point amount paid and divide by the number of payments for the entire loan. A 30 year loan would have 360 payments. For each payment you make that year, you can deduct that amount off your taxes.
If you cash out part of your equity, you can also deduct the points in full that year in certain cases. For example, home improvements meet the IRS’s requirements.
When you pay off your refinanced mortgage early, you can deduct the remaining point amount 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 income 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 seller pays the points, they cannot be deducted either.
Paying Points on Refinance Isn’t Always Best
Points are a typical feature of today’s mortgages, but don’t plan on paying several points just for the tax write off.
Points are usually paid to further reduce 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 lowest 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, decide if you can come out ahead by paying additional points. Remember that the tax deduction will only save you pennies on the dollar.
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Carrie Reeder is the owner of ABC Loan
Guide, an informational website about various types of loans.
