Points paid in the course of refinancing a mortgage tied to your primary residence are not fully deductible in the year they are paid or incurred. The deduction of points in this case must be applied evenly over the life of the loan (i.e. on a 30 year loan, 3.33% per year and on a 15 year loan, 6.66%). However there is an exception to this general rule (see Home Improvement Loans below). Also note that when a refinance loan is paid off in full before the deduction is fully realized over the 30 or 15 year period, you can then accelerate the deduction and deduct in full any un-deducted portion of the points yet to be taken on the loan. The exception to this accelerated mortgage points deduction rule applies if you were to refinance the loan again with the same lender. In that case you would simply extend the deduction of the points on the previous loan over the term of the new loan.
Various Fees Associated With a Loan
Fees charged for services connected to the mortgage loan, other than points, such as appraisal, notary, document preparation fees, mortgage insurance premiums and the like are not deductible in either the year they are paid orover the life of the loan.
Home Improvement Loans
You can fully deduct the points paid on a loan used solely to improve your primary residence in the year in which they are paid or incurred. Suppose that you refinance the mortgage on your home and only a portion of the loan is to be used for the purpose of home improvement. In this case you are permitted to deduct the percentage of the points paid from your own funds that correlate directly to the portion used for the improvements.
Please
see our Tax Benefits of Home Mortgages page. It provides a menu of IRS Pubications related to Home Mortgage Interest Deduction and related tax issues. Also consult with your tax advisor.
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