The Tax Benefits of Refinancing

Refinancing your mortgage loan is akin to taking out a whole new loan in terms of paperwork and time, yet refinancing has many benefits that can be well worth the energy.

Refinancing may allow you to:

  • Take advantage of lower interest rates.
  • Acquire extra cash for debt consolidation or expenses.
  • Allow you to pay off your mortgage faster by shortening the loan term.
  • Reduce your monthly payments.
  • Extend your payment period.
  • Shorten the term of your loan.
  • Offer much needed tax breaks.

If interest rates are 1/2% to 5/8% lower than your current interest rate, it may be a good time to consider a refinance. Taxpayers may deduct points only for those payments made in the tax year. For a refinanced mortgage, the interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan.

However, if part of the refinanced mortgage money was used to finance improvements to the home and if the taxpayer meets certain other requirements, the points associated with the home improvements may be fully deductible in the year the points were paid. Also, if a homeowner is refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible at pay off.

Many homeowners consider refinancing when interest rates suddenly fall or when there’s a change in financial circumstances. Even though a large decline in rates or an opportunity to pay off debts might make refinancing seem like an easy decision, you shouldn’t consider any single variable on its own. Think about how long you plan to stay in your home, how you plan to use your equity, and how a refinance will support your overall financial goals.

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