Deducting the Costs of Refinancing a Mortgage on Your Federal Income Tax Return

If you paid points, sometimes called an origination fee, to refinance your mortgage, normally you would not be able to deduct the points in full in the year you refinanced. You would deduct the points over the life of the loan. Generally, you should receive Form 1098, Mortgage Interest Statement, from the lender. If the points are not included in box 2 of the form, you can still claim a deduction. In this case you would report the amortized portion of the points on line 12 of Schedule A, Itemized Deductions.

If you sell the home, pay off the mortgage early, or refinance again before you have deducted all the points, you can deduct the balance of the unamortized points in the year you sell, pay off the balance, or refinance again. However, if you refinance with the same lender, you will have to spread the unamortized balance of points, plus any new points you pay over the life of the new mortgage loan.

If you refinance for more than the principal balance of your old mortgage, sometimes called cash-out refinancing, and you use the cash to make improvements to your main home, you can deduct a portion of the points in the current year and the balance would be spread over the life of the loan.

For example, if you refinanced a $150,000 mortgage with a new $200,000 15-year mortgage and paid two points ($4,000), and you used the $50,000 to make improvements to your main home, you could deduct one-fourth of the points ($1,000) in the current year. The remaining $3,000 would be amortized over the life of the loan at $16.67 a month. If you made six monthly payments on the new mortgage loan during the year, your home mortgage interest deduction for the year would be $1,100, which is the $1,000 for the points applicable to the home improvements plus 6 months of amortization of the remaining points.

If you use the extra cash from the refinancing for something other than home improvements, it is considered home equity debt and any points you pay would be deductible over the life of the new mortgage loan.

According to the IRS, any secured debt you use to refinance your main home or second home is considered home acquisition debt, but only up to the balance of your old mortgage before you refinanced. The difference would be considered home equity debt. In order for your interest and points to be deductible, the total home acquisition debt cannot be more than $1,000,000 ($500,000 if you are married filing separately).

The total home equity debt on your main home and second home cannot be more than $100,000 ($50,000 if married filing separately), or the total fair market value of the home or homes, minus the home acquisition debt, if this amount is less.

Sources:
Form 1098 - Mortgage Interest Statement - IRS
Instructions for Schedule A - IRS
Mortgage Interest Deductions: Refinancing - Taxes In-Depth
Publication 936 - Home Mortgage Interest Deduction - IRS
Schedule A - Itemized Deductions - IRS