Refinancing your mortgage can offer great financial benefits, like reducing your monthly payment or lowering your interest rate. But did you know that if you paid points during the refinance, you may be eligible for a tax deduction? Many homeowners overlook this tax-saving opportunity, so let’s explore how mortgage points work and how you can potentially deduct them from your taxes.
What Are Mortgage Points?
Mortgage points, also known as discount points, are fees you pay upfront to lower your interest rate over the life of your loan. Each point typically costs 1% of your total loan amount, and paying points can save you money by reducing the overall interest you pay on the mortgage. Points are often paid during the refinancing process, and in many cases, they may be tax deductible.
How to Deduct Mortgage Points on a Refinance
If you paid points when you refinanced your mortgage, the IRS allows you to deduct them, but the rules differ slightly from those for points paid on an original home loan. Here’s how it works:
1. Spread Out the Deduction Over the Loan Term
- Unlike points paid on a new home purchase, which are typically deductible in the year they are paid, points paid on a refinanced mortgage must be deducted over the life of the loan. For example, if you refinance your mortgage for 15 years, you would deduct a portion of the points each year for the next 15 years.
2. Use IRS Form 1098
- Your lender will usually send you IRS Form 1098, which shows the mortgage interest and points you paid during the year. This form is essential for claiming the deduction. Keep a copy for your records and include it when filing your taxes.
3. Deduct All Points in Special Cases
- There are some situations where you may be able to deduct the full amount of points in the year they were paid. If part of the refinanced mortgage proceeds were used to improve your main home, you might be able to fully deduct the points related to the improvement portion right away. This can provide a larger immediate deduction.
4. When Refinancing Again
- If you refinance again before the end of the current loan’s term, you may be able to deduct any remaining points from the first refinance in the year of the second refinance. This can result in a more substantial tax deduction when you refinance multiple times.
Keeping Records Is Key
To claim a deduction for the points you paid, you’ll need to maintain detailed records, including:
- The HUD-1 Settlement Statement or Closing Disclosure document, which shows the points paid at closing.
- IRS Form 1098 from your lender.
- A record of how much of the loan was used for home improvements (if applicable).
Why It’s Worth Tracking Your Mortgage Points
Refinancing can already bring substantial financial benefits, and deducting your mortgage points adds another layer of savings. Even though the deduction is spread out over the loan term, it can still reduce your overall tax burden each year, adding up to significant savings over time.
Final Thoughts
If you’ve refinanced your mortgage and paid points, don’t forget to claim your deduction! Properly tracking and deducting your points can save you money each year you’re paying off the loan. Unsure how to get started or how much you can deduct? At Jose’s Tax Service, we specialize in helping homeowners navigate the tax implications of refinancing and ensuring you claim all eligible deductions. Reach out to us today to maximize your tax savings!