When refinancing a mortgage to get a lower interest rate or obtain more favorable loan terms, you're really just taking out a new loan and using the money to pay off your existing home loan. In general, the same tax deductions are available when you're refinancing a mortgage as when you're taking out a mortgage to buy a home.
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With any mortgage—original or refinanced—the biggest tax deduction is usually the interest you pay on the loan. Generally, mortgage interest is tax deductible, meaning you can subtract it from your income, if the following applies:
When you use TurboTax, it helps you decide which option—itemizing or the Standard Deduction—will save you more money. At year's end, your mortgage lender sends you a statement, called Form 1098, explaining how much you paid in interest during the year.
If you paid "points" when you refinanced your mortgage, you may be able to deduct them. Points are prepaid interest; you pay them upfront to get a lower interest rate during the period when you're repaying the loan. One point equals 1% of the loan amount, so if you paid 2 points on a $100,000 loan, for example, you would have paid $2,000. Points sometimes go by other names, including:
Points paid as part of a mortgage refinance usually must be deducted over the life of the loan. If you refinanced to a 15-year mortgage, for example, then you'd deduct a portion of the points each year for 15 years. This is different from points paid when you first bought the home; points on an original purchase can often be deducted in full in the year they're paid.
You "settle" or "close" your mortgage refinancing when you sign all the paperwork to officially take out the new loan and pay off the old one. A number of fees and charges may be applied at settlement. These closing costs can add up to hundreds or thousands of dollars and may include such things as:
These costs are generally not deductible in a mortgage refinance if they're for your residence.
The rules are different when you're refinancing the mortgage on a property you use to generate rental income. Rent you receive from tenants is taxable income, and you must report it on your tax return. However, money you spend to generate that income can usually be deducted from your rental income. So you can deduct not only the interest and points paid on a mortgage on rental property, but also all closing costs and fees. (Learn more about tax deductions for rentals with “Rental Property Deductions You Can Take at Tax Time”.)
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