You can deduct points paid for refinancing generally only over the life of the new mortgage.
Can you deduct these closing costs on your federal income taxes? In most cases, the answer is “no.” The only mortgage closing costs you can claim on your tax return for the tax year in which you buy a home are any points you pay to reduce your interest rate and the real estate taxes you might pay upfront.
You can only deduct closing costs for a mortgage refinance if the costs are considered mortgage interest or real estate taxes. You closing costs are not tax deductible if they are fees for services, like title insurance and appraisals.
Points, also known as discount points, lower your interest rate in exchange paying for an upfront fee. Lender credits lower your closing costs in exchange for accepting a higher interest rate. These terms can sometimes be used to mean other things. “Points” is a term that mortgage lenders have used for many years.
Your property taxes may increase if your assessment or rate increases. Refinancing your home doesn't impact these numbers. When you finalize your cash-out refinance near or on the date your property taxes are due, you could end up paying these taxes when you close on the loan.
The cash you collect from a cash-out refinancing isn't considered income. Therefore, you don't need to pay taxes on that cash. Instead of being considered income, a cash-out refinance is simply a loan. Depending on how you spend the money from a cash-out refinance, you might even be eligible for a tax deduction.
You can fully deduct the part of the mortgage points for an improvement. You can do this in the year you paid them with your own funds if both of these apply: You use part of the refinanced mortgage proceeds to improve your main home.
Income Phaseout
There is an income threshold where once breached, every $100 over minimizes your mortgage interest deduction. That level is roughly $200,000 per individual and $400,000 per couple for 2021.
To maximize your mortgage interest tax deduction, utilize all your itemized deductions so they exceed the standard income tax deduction allowed by the Internal Revenue Service.
Homeowners insurance is typically not tax deductible, but there are other deductions you can claim as long as you keep track of your expenses and itemize your taxes each year.
As noted, in general you can deduct the mortgage interest you paid during the tax year on the first $1 million of your mortgage debt for your primary home or a second home. If you bought the house after Dec. 15, 2017, you can deduct the interest you paid during the year on the first $750,000 of the mortgage.
The lower the rate you can secure upfront, the less likely you are to want to refinance in the future. Even if you pay no points, every time you refinance, you will incur charges. In a low-rate environment, paying points to get the absolute best rate makes sense.
There are no points on the refinance. Because you refinanced with the same lender, the remaining $3,060 in unamortized points must continue to be amortized over the 180-month term of the new loan. However you may have refinanced, check your points to make sure you get the deductions you deserve.
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
The Bottom Line: 1% In Pennies Adds Up To A Small Fortune
While it might not seem like much of a benefit at first, a 1% difference in interest savings (or even a quarter or half of a percent in mortgage interest rate savings) can potentially save you thousands of dollars on a 15- or 30-year mortgage.
It's important to understand that points do not constitute a larger down payment. Instead, borrowers “buy” points from a lender for the right to a lower rate for the life of their loan. Buying points does not help you build equity in a property—you just save money on interest.
Generally, the more points you pay upfront, the lower your interest rate will be. How do points lower interest rates? Because they're prepaid interest, points reduce the interest rate you'll pay over the life of the loan. A rule-of-thumb is that paying one point will reduce your interest rate by one-quarter percent.
The itemized deduction for mortgage insurance premiums has been extended through 2021. You can claim the deduction on line 8d of Schedule A (Form 1040) for amounts that were paid or accrued in 2021.
That means this tax year, single filers and married couples filing jointly can deduct the interest on up to $750,000 for a mortgage if single, a joint filer or head of household, while married taxpayers filing separately can deduct up to $375,000 each.
You Don't Itemize Your Deductions
If you don't itemize, you get no deduction. You should itemize only if your total itemized deductions exceed the applicable standard deduction for the year.
Premiums for company health insurance are not tax-deductible. Employers deduct premium payments from your paycheck on a pretax basis. Since your employee contributions are already taking advantage of tax savings, you can't deduct them again on your return.
Is PMI deductible? The legislation, signed into law Dec. 20, 2019, not only makes the deduction available again for eligible homeowners for the 2020 and future tax years, but also enables taxpayers to take it retroactively for the 2018 and 2019 tax years by filing amended returns.
However once you are at full retirement age (between 65 and 67 years old, depending on your year of birth) your Social Security payments can no longer be withheld if, when combined with your other forms of income, they exceed the maximum threshold.