In the wake of the current economic climate, interest rates are falling, and that means the number of homeowners interested in refinancing is rising. As such, homeowners are wondering what kind of benefit refinancing may have on their taxes.
If you’re thinking of refinancing, or have recently refinanced, here are some key considerations to keep in mind:
Interest deductibility
While certain limitations do exist, interest paid on a refinanced mortgage that was obtained to acquire your home is deductible. However, interest in a refinanced home equity loan — a loan take out well after purchase that is secured by the increase of equity in your home — currently isn’t deductible unless the funds were originally used to substantially improve your home.
Points deductibility
The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain an original or refinanced home mortgage. On a closing statement, you may see points referred to as loan discount, or discount points. Points are usually paid to buy down the interest rate on a loan.
When refinancing your original mortgage, points are deductible over the life of the loan instead of all at once. The deducible amount is calculated by dividing total points by the number of payments to be made over the life of the loan, and then multiplying this result by the number of payments you made in the tax year.
When refinancing an existing home equity loan, points currently aren’t deductible.
Mixed refinancing
Sometimes it’s possible to refinance for more than the outstanding loan. This happens when equity builds up over years of ownership. If you receive additional funds when refinancing an original loan or home equity loan, the deductibility of interest and points depends upon how you use those extra funds. The portion of interesting points representing the funds used for substantial improvements to your home are deductible in full in the year paid. If the funds aren’t used for substantial improvements, they’re currently not deductible.
Other refinance costs
Keep in mind that certain fees associated with refinancing, such as loan credit report fees, loan origination fees, and appraisal fees aren’t deductible, nor can you add them to the cost basis of your home.
If this feels a bit overwhelming, that’s OK! At PADGETT BUSINESS SERVICES®, we have a skilled team of trusted advisors you can work with to determine if refinancing your home mortgage makes sense and ensure that you take full advantage of any potential deductibility. Don’t hesitate to find an office and reach out today to see how we can help!