Mortgage Refinance Tax Breaks Every Homeowner Should Be Aware Of

Refinancing a mortgage can allow you to consolidate debts to reduce your monthly expenses, secure lower interest rates, switch loan terms, and access home equity for a variety of purposes.  Aside from this, you can take advantage of the tax deductions. You can claim these deductions after refinancing your mortgage to help you pay less in income taxes.  Now let’s dive into a mortgage refinance tax deductions, but keep in mind that whatever decision you make, it’s best to opt for the assistance of a mortgage broker to not make a wrong one. 

What Are Refinance Tax Deductions?

You may be able to claim tax deductions when submitting your taxes to lower your tax bill.  A tax deduction lowers the tax burden of a person or organization by reducing taxable income.

Is a mortgage refinance a tax deduction?  It can be depending upon what the funds are being used for and what type of property the refinance is happening on.  For example, you are taking equity out of your home to purchase an investment property.  These funds would be considered tax-deductible.  The biggest tax deduction with mortgages (whether original or refinanced) is the interest you pay on the mortgage. For instance, the interest that you pay for your mortgage will be deducted from your income through the mortgage interest deduction, reducing your tax liability.   

Refinance tax deductions are specific deductions that you can take after refinancing your mortgage.

What Refinance Costs Are Tax-Deductible?

You may be wondering:

  • Are refinancing costs tax-deductible? 
  • Which refinance costs are tax-deductible?

Several expenses associated with refinancing your mortgage may be tax-deductible. What are tax deductions for refinancing a mortgage? The following are some of the tax deductions available when purchasing or refinancing a home:

If the closing expenses are considered as real estate taxes or mortgage interest, they can be deducted for a mortgage refinance. If you pay for services such as title insurance and appraisals, your closing expenses are not considered tax-deductible.

Mortgage refinance tax deductions can be used for your main house, secondary home, or rental property.

You’ll understand more about which mortgage refinance fees are tax-deductible in a minute. 

How Does A Refinance Affect Your Tax Return?

You may ask how a to refinance affects your tax return. It’s important to remember that refinancing your mortgage might drastically lower your total tax deductions. You’ll pay less interest if you refinance to a lower mortgage rate. This means that when the time comes to pay the tax, you’ll have less mortgage interest to deduct.

Mortgage Refinance Tax Deductions You Need to Know

Are our home refinance fees tax-deductible? While not all mortgage refinancing fees are deductible, here are common mortgage refinance tax deductions. 

  1. Mortgage Interest

The mortgage interest deduction is the simplest to qualify for among the refinance tax deductions. Interest payments on the original mortgage, as well as any refinance, are deducted from your income. Interest payments on a primary and secondary house or rental property can be deducted

In most situations, interest payments on a mortgage or a refinance or equity take-out can only be deducted if the funds are used to buy, build or significantly develop your primary or secondary house or use the funds for investment purposes.  There are two ways of mortgage refinancing:

Traditional Refinance/Switch/Transfer – During this, your original mortgage is paid off and replaced with a new one. Usually, the new one offers you the interest rate and/or term that better fits your financial goals. Whenever you want to lower the interest rate or change the terms, you opt for this type of refinancing. The loan must be secured by your home for the interest to be tax-deductible.  The mortgage balance remains the same.  

Equity Take Out Refinance – During this mortgage refinancing option, you replace your existing mortgage with a larger mortgage amount compared to the balance remaining for the previously existing mortgage.  It allows borrowers to get some extra cash by using their home mortgage.  These funds can be used to make an investment in order to have them be tax-deductible.  The interest is not tax-deductible if used for other purposes such as traveling and consolidating higher-interest debts.

A Rental Property’s Closing Costs

Mortgage interest is a tax-deductible expense when you have a rental property.  You may also be able to deduct some other items such as closing costs.  The other closing costs associated with the purchase of the property are part of your depreciation deduction. The tax-deductible closing costs are:

  • Mortgage interest
  • Real-estate property taxes

Closing fees for your primary or secondary home cannot be deducted.

It is recommended that you consult with your accountant or tax professional in order to determine what mortgage expenses you are able to deduct.  Keep in mind that Jodi Habel who has over more than a decade of experience in the mortgage industry is always here to help you find the right mortgage for your needs. 

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