Refinance & Tax Implications

The IRS allows taxpayers to deduct interest costs and mortgage points when refinancing.

Homeowners may deduct fees paid to commercial lenders for interest on a mortgage. The lender will provide the taxpayer with a 1098 form, which includes the total interest that the taxpayer has paid on the mortgage during the year.

Identification

In addition to tax incentives for homeowners who have just purchased a home, and in recognizing Congress's encouragement of home ownership, the Internal Revenue Service (IRS) allows several significant tax deductions for refinancing an existing mortgage. The IRS allows homeowners to deduct mortgage interest, lenders' assessed points and private mortgage insurance fees.

Size

Taxpayers who are wondering if refinancing will be cost-effective should consider the loss of tax benefits in any interest rate reductions. For instance, a taxpayer who reduces the mortgage interest by three percentage points will lose tax savings on those points. Spread over the year and taking into account the individual taxpayer's tax bracket, the loss in deductible interest can be more than $3,000 annually, which the taxpayer will no longer be able to deduct.

Considerations

Points paid up-front during refinancing can also be deducted. The points paid are percentages of the loan costs.

References

• The Federal Reserve Board: A Consumer's Guide to Mortgage Refinancings

Resources

• Bankrate: The Tax Consequences and Implications of Having a Mortgage