The tax benefits of refinancing your mortgage
- Posted: February 5, 2020
- By: Nations Lending
Mortgage rates are currently at historic lows, making refinancing not only attractive for current homeowners, but possibly lucrative as well. Even if your last refinance was only five years ago, these low mortgage rates could mean that now is the time to do it once again. Of course, that means you could take advantage of certain tax deductions in the process.
Mortgage Interest
If, for example, you’ve got $200,000 left on your mortgage and you want to cash out $30,000 of your equity, you could make potentially lucrative move by taking out that new $230,000 mortgage in a 15-year term so you’ll still meet your pay off goals while taking advantage of ultra low interest rates and the tax benefits of refinancing. You’ll then use that extra $30,000 to pay off credit cards, student loans, medical bills or other debts that might be hanging around like a (very annoying) monkey on your back.
The first 200k of the new mortgage’s balance would be the amount of your old mortgage that got refinanced. This debt is considered to be “home-acquisition” related, for tax purposes. Any interest charged on that portion of your refinanced mortgage– up to a cool million dollars– can be written off as an itemized deduction come tax time. Anything beyond a million isn’t tax deductible, but for most American homeowners, that isn’t a problem.
The 30k taken out as cash in addition to the amount leftover from your old mortgage is referred to as home equity debt from a taxation standpoint. Interest paid on that can also be written off in most cases, no matter how you spent that cash. However, the write off is generally capped at $100,000.
The second part has an initial balance of $35,000, which equals the cash you took out when you refinanced. This $35,000 part is treated as so-called home-equity debt for tax purposes. Interest on up to $100,000 of home-equity debt can also be written off on Schedule A (use Line 10 here too). It doesn’t matter how you use the loan proceeds. Interest on home-equity debt in excess of the $100,000 cap is generally nondeductible.
Points
If you were charged loan origination fees– or points– on your new refinanced mortgage, each point is equal to 1% of whatever the new loan’s balance is. In this example, 1% of $230k is $2,300. These points can also be written off on your taxes in some circumstances. Points have to be amortized over the life of the loan to be taken as a deduction, so in general, they aren’t a huge write off. However, when it comes to Uncle Sam, every penny counts.
Mortgage Insurance Write-Offs
The amount you pay to insure your mortgage may also be another one of the tax benefits for refinancing your mortgage. Whether you have an FHA loan and are paying MIP– or Mortgage Insurance Premiums– or have a conventional loan and are paying PMI– or private mortgage insurance– this may be yet another thing you can write off in April when you do your taxes.
There are an abundance of tax benefits of refinancing your mortgage, and with historic low mortgage rates happening right now, now could be the perfect time to refinance. However, refinancing alone doesn’t automatically give you tax breaks. For more information on how you could save money and get great tax benefits by refinancing the right way, call a Nations Lending personal mortgage advisor today toll-free at 1-877-816-1220.
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