Considering that closing costs, such as points, can run you thousands of dollars when you refinance, it's comforting to know that such fees are tax deductible. Learn how the process works, and you can get help with your debt by taking advantage of the tax benefits of refinancing on your next return.
Deductible refinancing charges
Qualifying points, which are prepaid interest charges, are tax deductible. Otherwise known as loan origination fees, these charges are deducted on your tax returns every year as long as the mortgage loan lasts. The cost of a point is generally equal to 1 percent of your mortgage, so if you refinance a $200,000 mortgage and you pay two points, then $4,000 can be deducted. Money paid for other loan services, such as appraisal and bank fees, is not tax deductible, however.
How it works
When you refinance, the points you pay are spread out over the life of the loan on your tax returns. So if your refinance resulted in a 15-year mortgage and you paid $2,000 in points, for the next 15 years you can deduct one-fifteenth of the $2,000 on your tax returns. The more points you pay, the more money you can write off.
Additional tax deductions
Once you refinance, you may also be eligible for deductions based on your prior loan. If there were points remaining on the former loan, all of that money can now be deducted on your tax return. If it hasn't been that long since you last refinanced, this amount may be substantial, which could save you a considerable amount on your current taxes.
Refinancing to take advantage of lower interest rates and smaller monthly payments can be a viable way to pursue your debt reduction goals. But knowing that loan fees can be writen off over the course of your mortgage makes refinancing an even better alternative.
About the Author:
Julie Bawden-Davis is a Southern-California-based writer specializing in personal finance and insurance. Since 1983, her work has appeared in a wide variety of publications, including Family Circle, Ladies' Home Journal, Parenting, Entrepreneur and The Los Angeles Times.