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Tax Break Refi Rules for Refinancing Your Home

Palm State Mortgage Company does not pretend that we are tax advisors.  However, we have had some questions from refinancing clients concerning their taxes.  Indeed, the time is coming very soon for homeowners to turn their attention to getting a break.  We do not mean a coffee break, but something just as good or better—a tax break.

Did you know that a home mortgage, original or refinanced, comes with a tax break for the interest you pay on the loan?  If you didn’t know about this tax deduction or if you have questions, then this blog is dedicated to you.  It’s true, you actually get to deduct the interest you pay on your mortgage from your income.  However, it will only work if you know and follow the rules.

Taking A Tax Break:  Questions about your Re-fi Loan and Interest

One primary consideration you need to know is primary and preliminary for all taxpayers:  Should you utilize itemized tax deductions or should you take the standard deduction based on your tax status? 

Tax breaks are not as easily understood as coffee breaks.

Coffee Break or tax break-reason for a happy dance!

The standard tax deduction is an amount predetermined by the IRS.  They base it according to the status or way you file, like “single, married or joint filing.  Here’s the scoop from the cleverly named experts at Money Under 30, an online finance and tax resource.

“To find your taxable income, you must subtract the standard or itemized deduction from your Adjusted Gross Income (AGI).  To be blunt, these deductions are our friends because they lower the amount of taxes that we have to pay.”

The experts add the logical conclusion to most deduction questions:  “Itemized deductions are comprised of various types of certain expenses that you incur throughout the year (things that are—surprise, surprise—“tax-deductible”).

If the total amount of these expenses is greater than the standard deduction amount, you should itemize instead of taking the standard deduction.”  Now you know how you should answer question 1 on our Quiz below:

Take our Palm State Mortgage Re-fi Tax Rules Quiz:

The answers to these questions will determine if your home loan qualifies for the tax deduction:

1.      Are You Filing an Itemized form?  (See information above…)

2.      Do you actually live in the home?  You cannot deduct the interest from your income unless the home is your primary residence or a second home that you use directly.  This is not a deduction for a home you rent to other people.  Rental property has different rules.

3.      How did you secure the refi mortgage?  The loan must be secured by the home itself.  Palm State Mortgage wants to clarify this tax point:  “This means your home serves as collateral for the loan.  And if you fail to make your payments, the lender can foreclose on the home.”

4.      Can You Claim Re-Fi Mortgage Points? 

You might have read our previous blog in which we discussed mortgage points.  We have good news for you if you bought them when you re-financed your home mortgage:  They qualify for a tax deduction because they are essentially prepaid interest in the eyes of the law.   Learn more about Mortgage Points in our previous blog.

A Cautionary Rule:   On Claiming Mortgage Points for Your Taxes:

Some mortgage companies do not designate mortgage points as such.  They call them by several different names, so look out for these names:

Homeowners get a tax deduction for interest paid on refi mortgages--Happy Dance!

Happy Mortgage Interest Tax Deduction Dance

  • Discount points,
  • Loan origination fee,
  • Maximum loan charge,
  • Loan discount,

This is good for you!  All four of these terms mean “mortgage Points.” And, all four types of terminology qualify for tax deduction. (Depending on how many you have, this realization might invite your “happy dance.”  Hoo-ray!

You need to know you must typically deduct these points bit by bit, just a little at a time during the life of the loan. This is easy to understand.  For example, if you refinanced your home to a 15-year mortgage, then you would deduct a portion of the points each year for 15 years, as opposed to 15 years worth of point value from your first year.

Also, it is important for you to note that these points are significantly different from the points you paid upon the first purchase of your home. You might already know that you can often deduct points in full when they are on an original purchase of a home.

No Tax Help With Settlement Fees

5.    Did you “settle” or “close” your mortgage refinancing when you signed all the paperwork to officially take out the new loan and pay off the old one? 

There are often some fees and charges applied at a settlement.  They are not deductible.  So pay close attention to the list below, and do not confuse them with the deductible points on the list above:

Attorney fees

Settlement Fees  

Inspection costs 

Legal and recording fees 

Appraisal fees 

How Tax Savvy Are You About Your Home Mortgage?

How did you do on our 5 point quiz?  Here at Palm State Mortgage, we hope you now have answers to the basic FAQs you might need to plan your tax deduction for refi mortgage points.

2017 is fast fading into and all of us must begin thinking about the coming of holidays, taxes and inevitably, 2018!

We’ve already seen a few of October’s pumpkins and summer has evaporated in the laughter of children walking to school.  Remember Palm State Mortgage is here for you if autumn’s cooler temperatures are tempting you to shop for a new mortgage or refinance at today’s low rates.  Happy fall, and thank you for reading our blog.  Now–about that coffee break we mentioned in the opening paragraph…Enjoy!

2017-09-29T23:52:29+00:00 September 29th, 2017|