If you are one of thousands who locked into a lower home mortgage interest rate, then you’ve hit the savings jackpot! Besides getting one of the lowest rates in decades, you may be able to deduct some of the refinancing costs when you file your tax return.
Original Mortgage Points
Points paid by a borrower at the time a home is purchased are immediately deductible as interest if they are charged solely for the use of the lender’s money. Points for this purpose may be referred to as:
- Loan origination fees;
- Processing fees;
- Maximum loan charges; and
- Premium fees.
Amounts paid for services provided by the lender are not deductible as interest. These items include:
- Appraisal fees;
- Credit investigation charges;
- Recording fees; and
- Inspection fees.
Refinancing Points
Unlike points paid on an original mortgage, taxpayers cannot immediately deduct points paid when refinancing. The points paid on a straight refinancing are deductible over the life of the loan. The interest deduction for refinancing points is calculated by dividing the points paid by the number of payments to be made during the life of the loan.
Example: You paid $3,000 in points on the refinancing of your home. The new loan is a 30-year mortgage where you will make 360 payments. You may deduct $8.33 of the original points per month, or $99.96 per year.
Note: The deduction for refinancing points is only available to taxpayers who itemize deductions.
If refinancing proceeds are used to refinance an existing mortgage and to pay for improvements to the home, the portion of the points attributable to the improvements are deductible in the year they are paid if they are paid out-of-pocket. The remaining points would then be deductible ratably over the life of the loan.
If your are refinancing for a second time, you may immediately deduct points paid and not yet deducted from a previous refinance. If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. A mortgage may end early because of a prepayment, refinancing, foreclosure, or similar event.
If you need assistance with tax preparation, or have questions regarding your refinancing costs, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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