Homeowners can lower their interest rate, shorten the length of their loan, or get access to the equity in their home by refinancing their mortgage. But it also comes with closing costs. If you own your own home, you may be wondering if you can write off these refinance closing costs when you file your taxes.
The answer is – it depends. Some refinance closing costs may be tax deductible, while others are not. Here’s what you need to know about deducting closing costs when you refinance your mortgage.
What are Closing Costs?
Closing costs are fees charged to process and finalize a mortgage refinancing. They can include:
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Appraisal fee – For the appraisal to determine the home’s current value.
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Credit report fee – For the lender to check your credit
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Title search and insurance – To ensure clear title and protect the lender.
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Recording fees – To record the new mortgage with the county.
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Origination fees – Application and processing fees charged by the lender.
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Points – Upfront interest charges paid to lower the interest rate
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Taxes and insurance – Prorated property taxes and prepaid insurance premiums.
Closing costs typically range from 2-5% of the mortgage loan amount. On a $200,000 refinance, you could pay $4,000-$10,000 in closing costs.
Closing Costs You Can Deduct
When refinancing, certain closing costs may be tax deductible if you itemize deductions on Schedule A.
Mortgage interest – The interest portion of your mortgage payment is deductible, including on a refinance.
Points: You may be able to write off points paid to lower the interest rate over the life of the loan.
When you get a cash-out refinance, you can deduct the interest on your home equity loan as well.
Private mortgage insurance – PMI premiums on loans originated after 2006 are deductible.
Prepaid interest – Any interest paid at closing beyond the current month is deductible.
Loan origination fees – May be deductible over the life of the loan.
Appraisal and credit check fees – May be deductible over the loan term.
Title fees and recording fees – May be deductible over the life of the loan.
Closing Costs That Aren’t Deductible
Many common refinancing closing costs are not deductible for primary residences:
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Title insurance premiums
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Property taxes
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Homeowners insurance premiums
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Home appraisal fees
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Document preparation fees
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Notary fees
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Survey fees
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Transfer taxes
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Application fees
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Attorney fees
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Recording fees
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Inspection fees
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Mortgage insurance premiums
These fees can be written off as business costs if you refinance a rental property or second home. But for a primary residence, they cannot be deducted.
Claiming the Deduction
To deduct refinance closing costs on your taxes:
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You must itemize deductions on Schedule A.
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The refinanced loan must be secured by your primary residence.
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Keep records like your closing disclosure to verify deductible costs.
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Deduct points and fees over the life of the new loan.
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Report deductible interest paid at closing on Schedule A.
Work with your tax preparer and lender to identify deductible closing costs when you refinance. Tracking deductible expenses can help maximize your tax savings.
The Impact on Your Tax Bill
Whether closing costs on a refinance are deductible depends on your specific situation. Itemizing all eligible expenses can lower your taxable income.
For example:
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If you paid $5,000 in closing costs on a refinance, you may be able to deduct $3,000.
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If you’re in the 22% tax bracket, that could reduce your tax bill by $660 (3,000 x 0.22).
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Over the life of a 15-year mortgage, deducting $200 of closing costs each year could save you $1,320 in taxes.
Consult a tax professional to run the numbers and see if deducting refinance closing costs makes sense for your financial situation.
Key Takeaways
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Some refinance closing costs are tax deductible, while many common fees are not.
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Interest, points, PMI, loan fees may be deductible over the life of the loan.
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Title insurance, property taxes, and other fees are usually not deductible.
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You must itemize mortgage interest deductions on Schedule A.
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Keep documentation to verify deductible closing costs.
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Work with a tax pro to maximize eligible refinance closing cost deductions.
Deducing eligible expenses when you refinance could put money back in your pocket come tax time. Know what closing costs are tax deductible before filing your return.
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Mortgage interest tax deduction
With any mortgage—original or refinanced—the biggest tax deduction is usually the interest you pay on the loan. Generally, mortgage interest is tax deductible, meaning you can subtract it from your income, if the following applies:
- The loan is for your primary residence or a second home that you do not rent out
- The loan is secured by your home. This means your home serves as collateral for the loan; if you fail to make your payments, the lender can foreclose on the home
- You “itemize” deductions on your tax return, meaning you list all of your deductible expenses, add them up, and then deduct the total amount from your income. The alternative to itemizing is to take the Standard Deduction, which is a set amount you can claim regardless of your actual expenses. (Learn more about itemizing with “What Are Itemized Tax Deductions?”)
When you use TurboTax, it helps you decide which option—itemizing or the Standard Deduction—will save you more money. At years end, your mortgage lender sends you a statement, called Form 1098, explaining how much you paid in interest during the year.
If you paid “points” when you refinanced your mortgage, you may be able to deduct them. Points are prepaid interest; you pay them upfront to get a lower interest rate during the period when youre repaying the loan. One point equals 1% of the loan amount, so if you paid 2 points on a $100,000 loan, for example, you would have paid $2,000. Points sometimes go by other names, including:
- loan origination fee
- maximum loan charge
- discount points
- loan discount
Points paid as part of a mortgage refinance usually must be deducted over the life of the loan. If you refinanced to a 15-year mortgage, for example, then youd deduct a portion of the points each year for 15 years. This is different from points paid when you first bought the home; points on an original purchase can often be deducted in full in the year theyre paid.
Can You Deduct Mortgage Refinance Closing Costs? – CountyOffice.org
FAQ
Can I deduct closing costs for a mortgage refinance?
You can deduct closing costs for a mortgage refinance if the costs are considered mortgage interest or real estate taxes. Points are also deductible since they’re considered prepaid interest. However, closing costs that are fees for services, such as title insurance and appraisals, are not tax deductible.
Are refinance costs tax deductible?
Some of the costs associated with refinancing your mortgage are tax deductible while others are not. Popular tax deductions for a refinance include mortgage interest, discount points and the closing costs on a rental property refinance. Should I itemize my taxes or take the standard deduction?.
Are closing costs tax deductible for refinancing a rental property?
Closing costs are tax-deductible for refinancing rental properties because the money earned is seen as taxable income. When you refinance a rental property, you can deduct closing costs and other maintenance costs in a lot more ways. Some expenses you can claim as deductions on a rental property include:
Can I deduct a home loan if I refinance?
Generally, when you refinance your main home or a second home for personal use (such as vacation property or a cabin), you can only deductpoints over the life of the loan. You’ll need to take the itemized deduction. Mortgage interest and real estate taxes may also be deductible if you itemize.
Are property taxes deductible if you pay interest at closing?
If you pay any interest at closing, known as prepaid interest, it is generally deductible. You can claim this deduction for the interest you paid early at closing. This lowers your tax bill and, in the long run, makes it cheaper to borrow money. Any property taxes you pay at closing are usually deductible.
Can you write off refinance closing costs?
Popular tax deductions for a refinance include mortgage interest, discount points and the closing costs on a rental property refinance. Dec 9, 2024.
Can you include closing costs in a refinance?
Yes. A “no-cost refinance” means that the closing costs are rolled into the new loan. This may be a good idea if you want to save money in the short term. You can add up-front costs to your new loan in two main ways. The first is to get lender credits.
Are closing costs tax deductible?
Generally speaking, closing costs are not allowable as a deduction on your return. They are an increase in your basis or cost of the property to you.
Can you include closing costs in mortgage loan?
If you decide to roll in your closing costs, your lender will need to approve you for the higher loan amount. This may require additional underwriting and documentation to ensure you meet their LTV and DTI requirements.