Refinancing when rates are low can save you significant money in mortgage interest payments. It won't save you much on taxes, however. The interest on the refinanced mortgage is deductible, just like the original mortgage. Most other closing costs -- such as appraisal fees and loan origination charges -- are not.
Mortgage interest is deductible when you refinance. Like your original mortgage, you take this write-off annually, claiming the amount of interest you paid over the year. You can only claim this and the other refi-related write-offs if you itemize your deductions. The house you're refinancing must be your primary residence or your second home; mortgage interest on a third house isn't deductible. If you have more than $1 million in mortgage debt, only the interest on the first million is deductible.
In addition to your monthly mortgage interest payments, you may be asked to pay points -- mortgage-speak for prepaid interest -- at closing. On a first mortgage, you can deduct points in the year you pay them. With a refi, you have to deduct them over the life of the loan. For example, if you refinance to a 20 year mortgage and pay $2,000 in points, you'd get a $100 deduction every year. Some mortgage firms refer to other closing costs as points too, but calling them "points" doesn't make them deductible. Have your mortgage company clearly break out which of your payments qualify under Internal Revenue Service standards to avoid unpleasantness if you're ever audited.
If you have to pay for mortgage insurance as part of refinancing, some or all of the premiums may be deductible. You can take this write-off if you itemize, and if your adjusted gross income is less than $109,000. For married couples filing separately, the cut-off is $54,500. Much like points, you can't immediately write off any premiums you prepay at closing. Instead you deduct them year by year. However any premiums that cover the year of closing are deductible that year.
Weighing the Refi
With no tax write-off for most refi expenses, weigh whether the savings from a lower interest rate will outweigh the thousands of dollars you may pay in closing costs. The key question is time. The longer you'll stay in the house after refinancing, the more savings you'll see from the lower interest rate. If you plan to move in a couple of years, the lower monthly payments may not wipe out the closing costs.
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