Is Mortgage Interest on a Refinance Tax Deductible?

One of the most significant tax deductions homeowners can receive is mortgage interest. But what about if you refinance your mortgage? You might ask yourself, “Is mortgage interest on a refinance tax deductible as well?”

Keep reading as we dive into who can claim a mortgage interest tax deduction on a refinance.

Mortgage Interest Deduction Depends on Itemized vs Standard Deductions

Whether or not you can deduct your mortgage interest on a refinance depends on how you file your taxes. Anyone who uses the standard deduction cannot claim a deduction for mortgage interest.

However, if you itemize your deductions, you can claim this deduction up to a certain amount.

Your decision to use the standard deduction or itemize will depend on which can offer you the most significant benefit. Part of the Tax Cuts and Jobs Act of 2017 included a significant increase in the standard deduction amount.

The goal was to reduce the number of taxpayers itemizing, making tax filing easier.

For 2023 taxes (those filed in 2024), the standard deduction amounts are as follows:

• Single or Married Filing Separately: $13,850
• Married Filing Jointly: $27,700
• Head of Household: $20,800

Mortgage Interest Deduction on a Refinance

There are several different ways to refinance your mortgage. Each will impact how mortgage interest can be deducted on your tax return.

Rate and Term Refinance

Rate and term refinances are the most common way to refinance your mortgage. This allows borrowers to change the interest rate or loan term without changing the principal balance.

People typically do a rate and term refinance when interest rates drop, which can help lower monthly payments. Also, if you’ve decided to work toward paying off your mortgage faster, you could switch from a 30-year mortgage to a 15-year one.

This will increase your monthly mortgage payment, but the principal balance will remain unchanged. 

If you use a rate and term refinance, there are a few things to consider.

• If you’re a single filer or married filing jointly, you can deduct mortgage interest on the first $750,000.
• If you’re filing married filing separately, each person can deduct mortgage interest up to $375,000.
• It must be your primary residence or second home. If it’s your second home, it must be listed as collateral on the mortgage.
• If you claim mortgage interest on your second home and rent it out, you must still occupy it for 14 days or 10% of the days it’s rented, whichever is greater.
• Mortgage interest can’t be claimed on anything you own beyond your first and second home.

Cash-Out Refinance 

If you refinance your mortgage with a cash-out refinance, your new loan will be for more than your current loan. You’re essentially cashing out some of the equity that you’ve accumulated. 

As an example, let’s assume you owe $300,000 on your current mortgage, but your home is valued at $600,000. Lenders will allow you to take out a new mortgage over $300,000 and receive the extra cash as a lump-sum payment.

Maybe you want $30,000 to refinish your kitchen. Your new mortgage would have an updated principal balance of $330,000.

If you use the extra cash to make improvements to your home that increase its value, you can deduct mortgage interest on the new mortgage balance up to the $750,000 limit. However, if you use the cash for anything else, like purchasing a new car or paying off a credit card balance, you’ll only be able to deduct mortgage interest on the original mortgage balance.

Mortgage Points on a Refinance Are Deductible

Points are common when getting a mortgage. By purchasing mortgage points, you can reduce the interest rate you’ll receive on your loan.

Typically, one point equals a 0.25% reduction in your interest rate. The cost would be 1% of your loan amount. If you’re applying for a $300,000 mortgage, one point would cost $3,000.

Because mortgage points essentially allow you to prepurchase mortgage interest, the cost of points, even on a refinance, is tax deductible. However, you’ll usually need to spread the deduction out over the life of the loan.

How to Claim a Tax Deduction on a Mortgage Refinance

Your mortgage lender will send a Form 1098 toward the end of January or the beginning of February. This form states how much interest you paid on your mortgage the previous year.

You will then take this number and report it on your Form 1040 Schedule A.

If you purchased mortgage points on a refinance, Form 1098 will also list that amount. This will also be added to Form 1040 Schedule A.

However, because this deduction is spread out over the remaining life of your loan, you’ll need to calculate this amount. 

Suppose you paid $3,000 for mortgage points and have 20 years remaining on your loan. You can claim a deduction of $150 each year until your loan is paid off.

The Bottom Line

Many people refinance their mortgages to lower their monthly payments or speed up repayment. However, it’s essential to understand that when you refinance your mortgage, slightly different rules surrounding the mortgage interest deduction will apply.