Can I Use My Refinance Fees As a Deduction on My Federal Tax Return?
Homeowners may deduct some of the refinance fees as long as they meet the Internal Revenue Service guidelines. The IRS does not allow deduction of certain hard costs such as title insurance policies, appraisals, credit reports or underwriting fees. Typically, these costs are fixed and have no bearing upon the interest rate offered for the loan. The IRS defines some costs as prepaid interest and allows homeowners to deduct them from their taxes, if they meet a specific set of guidelines for the deductions.
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Points
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Often mortgage originators charge origination and discount points as a fee for obtaining the mortgage. The IRS defines mortgage points as prepaid interest and thus allows homeowners to deduct them from their tax returns. One point equals 1 percent of the loan amount. One point on a $100,000 loan is $1000. If the lender charges a flat fee instead of charging a percent of the loan amount, then the origination fee may not be deducted. The IRS allows deduction of points on refinance loans over the term of the mortgage. If your home loan has an amortization term of 30 years, they may deduct 1/30th of the points each year. Fortunately, when the loan is paid off, either through refinance or selling the home, the remaining points may be deducted at one time.
Pre-Paid Interest
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Most mortgage loans require prepaid interest so that the mortgage payment is due on the first of each month. If a mortgage loan closes and funds on Aug. 15 the lender will charge 16 days of interest so that the monthly payment is due on the first of the month and not on the 15th of the month. The amount a prepaid interest charged for the refinance is included on Form 1098, the interest deduction form provided by the mortgage lender.
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Mortgage Insurance
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If the refinance mortgage's loan amount exceeds 80 percent of the home's value, then the lender is likely to require mortgage insurance. If the combined annual income is a $100,000 or less, the homeowner may be able to deduct the mortgage insurance costs as well. The requirements for deducting mortgage insurance are stricter than they are for deducting mortgage interest, homeowner should consult a tax professional before claiming this deduction.
Taxes And Escrows
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Property taxes on homes are typically deductible as well. Many lenders require homeowners set up an escrow account for the tax payments. Often mortgage lenders require additional funds in the escrow account above and beyond the cost of the property taxes. This creates a buffer in case the taxes increase to ensure there are still sufficient funds to pay the monthly taxes. The IRS allows homeowners to deduct the entire amount placed in escrow, not just the amount of taxes paid.
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