Are you thinking of refinancing your home mortgage? Keep the tax rules in mind.
- Track “points.” A point is a fee equal to one percent of the loan amount. While you can fully deduct the points you pay when you buy your home, points paid on a refinancing are generally amortized over the term of the loan. If you refinance a loan for a second time, the balance of remaining points from the previous loan becomes immediately deductible. That’s also the case when you sell your home.
What if you refinance for more than your existing mortgage balance and decide to use some (or all) of the extra cash to improve your main home? A portion of the points you pay “up front” is deductible. Points not immediately deductible can be amortized over the term of the loan.
- Trace your use of funds. When you “cash out,” or convert $100,000 or less of your home equity to cash during a refinance, the interest is deductible. If you take additional amounts, the interest may or may not be deductible depending on how the funds are used. When you use those funds to expand your business, the interest may be deductible business interest. If you buy investments, the interest may be investment interest expense.
- Look at the whole picture. Not all loan fees are deductible. However, you can generally claim a deduction for some of the property taxes paid through the refinancing. One more reminder: Double-check your tax withholding or estimates when you refinance. Why? Reducing the interest rate on your loan means the mortgage interest deduction on your federal income tax return also goes down. Adjusting your withholding or estimated payments can help avoid an unanticipated tax bill.
Need more information on refinancing or mortgage interest tax deductions? Give us a call.