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Mortgage Refinance Tax Deductions: What You’re Eligible For And How To Claim Them

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Published on October 10, 2022
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Refinancing your mortgage loan to one with a lower interest rate can be a good financial move. Depending on how much lower your new rate is, you can save hundreds of dollars with each monthly payment. Or maybe you want to refinance to a mortgage with a shorter term. This can save you tens of thousands of dollars in interest payments over the life of your loan.

And here’s some additional good news: You might qualify for deductions on your income taxes once you close your refinance.

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Are Refinancing Costs Tax Deductible? 

Some fees associated with a mortgage refinance are tax deductible. It’s important to note, though, that the closing fees charged by your lender, title insurer, real estate agent and other parties are not among them unless you are refinancing a loan on a home you rent out. But if you itemize on your income taxes, you can generally deduct the interest you pay on your newly refinanced mortgage and the cost of any points you buy to lower your new loan’s interest rate.

Standard Deduction Vs. Itemized Deductions

You can only deduct refinance costs if you itemize your deductions.

When you file your federal income taxes, you have the choice to itemize each deduction you claim or to take the standard deduction available to all taxpayers.

For the 2022 tax year – the income taxes you will be paying in April of 2023 – the standard deduction for a single filer is $12,950. The standard deduction for married taxpayers filing jointly is $25,900, while it is $12,950 for married couples who file separately. The standard deduction is $19,400 for heads of households.

You should claim the standard deduction if your itemized deductions add up to less. Remember, though, you can’t claim any mortgage-related deductions if you opt for the standard deduction.

What Tax Deductions Are There For Refinancing?

The most common tax deductions for refinancing are centered on the interest you’ll pay on your new loan and any fees you pay for lowering your new loan’s interest rate.

Mortgage Interest Deduction

Most homeowners qualify for a mortgage interest deduction on their original purchase loan and on the new loan they receive after refinancing. This deduction, though, works differently depending on what type of refinance you complete.

Rate And Term Refinance Interest Deduction

In a rate and term refinance you replace your current mortgage loan with a new loan, often with a lower interest rate or a different term. You might refinance from a 30-year, fixed-rate mortgage with an interest rate of 6% to a new 30-year loan with a lower rate of 4.5%. Or you might refinance a 30-year, fixed-rate loan to a shorter-term 15-year, fixed-rate loan to save on interest payments during the life of your mortgage.

You can deduct the mortgage interest you pay each year on your new mortgage. There are limits, though.

  • Single filers, married couples filing jointly and those filing as the head of a household can deduct the interest they pay on up to $750,000 of their mortgage.
  • Married couples filing separately can each deduct the interest they pay on up to $375,000 of their mortgage.
  • Any mortgage loan that is used to buy, build or improve your home can qualify for the mortgage interest deduction. That includes the loan you are left with after completing a refinance.
  • You must itemize on your taxes to claim the mortgage interest deduction. If you claim the standard deduction instead, you can't claim this perk. Depending on how much mortgage interest you pay in a year, taking the standard deduction might give you a bigger tax break.
  • You can use this tax deduction for a home that is not your primary residence. This second home, though, must be listed as collateral for your refinanced mortgage.
  • If you rent out your second home, you must live in it for more than 14 days or more than 10% of the number of days you rent it, whichever is longer.
  • You can only deduct the mortgage interest you pay on one second home. If you have more than one, you can't deduct the mortgage interest you pay on any of your additional homes.

Cash-Out Refinance Interest Deduction

In a cash-out refinance you refinance for more than what you owe on your existing mortgage loan. You then take the extra money as a lump sum payment that you pay back each month when you make your regular mortgage payments.

Say you owe $200,000 on your mortgage loan. Considering you have enough equity, you can refinance for $270,000 and receive the extra $70,000 as a lump sum payment. You’d then pay back $270,000 – the total amount you borrowed – with interest in regular monthly payments.

You can deduct the full amount of interest that you pay on a cash-out refinance, up to the limit of $750,000, if you use the money to pay for improvements that increase the value of your home. If you use the money for other uses – such as paying down credit card debt or covering a child's college tuition – you can only deduct the interest you pay on your loan's original balance.

Here's an example: Say you owe $200,000 on your loan and you refinance to a new loan of $230,000. If you spend that extra $30,000 to pay down your credit card debt, you can only deduct the interest you pay each year on $200,000 of the $230,000 you borrowed. If you use that $30,000 instead to pay for a kitchen remodel, you can deduct the interest you pay on all $230,000 that you borrowed.

Examples of capital improvements to your home include:

  • Adding new bedrooms or bathrooms to the home
  • Installing a new roof
  • Building a swimming pool 
  • Upgrading to storm windows
  • Modernizing an outdated kitchen
  • Building a sunroom
  • Replacing your home’s old aluminum siding
  • Building a garage

Discount Points Deductions

Mortgage points, which are also known as discount points, are fees that home buyers pay to lenders for a lower interest rate. One mortgage point costs 1% of your loan amount. If you take out a mortgage loan for $200,000, you'll pay $2,000 for one mortgage point.

For each point you buy, your loan's interest rate will be reduced. How much a point will lower your rate varies by lender, but usually one discount point will lower your interest rate by .25%.

Mortgage points represent interest that you pay in advance. You can deduct discount points when you refinance, but you usually must spread out this deduction in equal amounts during the life of your loan. Points, though, can be tricky when it comes to deductions, especially if you used part of your refinanced loan’s proceeds to improve your primary home. It's best to ask a tax professional about how to handle deductions for mortgage points.

Deductions On Closing Costs For Rental Properties

You can deduct closing costs– the fees you pay to your lender, title insurer and other third parties that originate your mortgage loan – when you refinance a rental property. That's because the money you earn from a rental is considered taxable income. And the money that you spend to earn this income can usually be deducted from your rental income.

Some of the closing costs that you can claim as deductions on a rental property include:

  • The fees you pay to real estate attorneys
  • Refinance application fees
  • Legal and recording fees
  • Appraisal fees to determine the current market value of your rental property
  • State inspection fees

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How To Claim Refinance Tax Deductions

You’ll claim most refinance tax deductions over the life of your new loan.

Mortgage Interest

You can claim the mortgage interest you pay each year for your refinance loan on your federal taxes. You can only claim how much you paid. If you paid $4,500 in interest during this tax year, you can only claim that amount as a deduction.

You can also only claim this deduction if you itemize your taxes. To report to the IRS the interest you paid, you'll need to file your taxes using Form 1040. Your lender will send you a 1098 Form if you paid $600 or more in interest. This form will list how much you paid in mortgage interest during the current tax year. You’ll enter this number on line 8d of Form 1040 Schedule A.

Discount Points And Closing Costs

To claim a deduction for mortgage points, you'll again use Form 1040 to file your taxes. Your lender's 1098 form will show how much you paid in mortgage points during the year. Once you have this amount, fill it in on line 8a of Form 1040 Schedule A.

If you paid $6,000 for discount points and your refinanced loan has 10 years remaining on its term, you'd usually be able to deduct $600 a year from your federal taxes. You can claim this deduction each year until you pay off your refinanced loan.

If you are deducting the closing costs associated with refinancing a loan on a rental property, you will also claim these over the life of your loan. If you spent $4,000 to refinance to a new 10-year mortgage, you could deduct $400 a year on your taxes for the next 10 years.

FAQs About Refinance Tax Deductions 

Here are some answers to some of the more common questions people have. 

What refinance deductions are tax deductible?

For a standard refinance, in which homeowners refinance to a new loan with a new interest rate and possibly a new term, married couples filing their taxes jointly and single filers can deduct the mortgage interest they pay on up to $750,000 of their new loan each year, if they itemize on their taxes. Homeowners can also deduct any fees they paid for mortgage discount points, usually spreading this deduction out over the life of their loan.

Are refinancing fees or closing costs tax deductible?

This depends. If you are refinancing the home in which you live, you can’t deduct any closing costs or fees on your taxes. If you are refinancing a home that you rent out, though, you can deduct some refinancing fees. That’s because homes you rent out earn you income, and the money you spend to earn that income is considered tax deductible.

What are the limits on the mortgage deduction for refinancing?

Single filers, married couples filing jointly and those filing as the head of a household can deduct the interest they pay on up to $750,000 of their mortgage. Married couples filing separately can each deduct the interest they pay on up to $375,000 of their mortgage.

What types of mortgages qualify for the mortgage deduction?

Any mortgage loan that is used to buy, build or improve your home can qualify for the mortgage interest deduction. That includes the loan you are left with after completing a refinance.

The Bottom Line On Refinance Tax Deductions

Refinancing a mortgage can leave you with a lower monthly payment or can save you tens of thousands of dollars in interest payments during the life of your loan. Refinancing can also bring tax deductions, specifically on the amount of interest you pay each year on your new mortgage loan. If you are ready to refinance your home start your application online with us today.

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Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, RocketMortgage.com and RocketHQ.com.