by Dusty Brazil
CA BRE #01780273
Pacific Sotheby’s International Realty
Del Mar, CA 92014
Are you a retiree who is on a reduced or fixed income? Do you still have a mortgage? Then you might want to consider a mortgage refinance. After all, interest rates have never been lower. And it is likely that interest rates will rise in the next year or two as the economy continues to improve. But when you refinance, you not only can get the benefit of a lower interest rate and a lower monthly payment: You also can enjoy substantial benefits at tax time! Want to learn how you can pay less to Uncle Sam next April after you do your mortgage refinance? Keep reading!
#1 Mortgage Interest
With your original or refinanced mortgage, the largest tax deduction you will get is most often the interest that is paid on the loan. For most Americans, mortgage interest is tax deductible up to a certain amount. This means that you can subtract that interest from your income, and this will typically lower your taxes substantially each April. You can deduct the mortgage interest on your original mortgage and any refinanced mortgage in these circumstances:
- The loan is for your first or second home that is not rented out
- The loan is secured by the home itself. This means that your house is collateral for the mortgage loan. If you do not make your payments, the lender can take the home.
You itemize your deductions on your tax return. This means that you are listing all of your tax deductible expenses. You add them up, and then deduct it from your gross income.
If you are refinancing into a lower interest rate, you will of course not be able to deduct as much mortgage interest as before, but you will drop your monthly payment. Another option is if you ever take out a second mortgage on your home with a home equity line of credit. You can use that money for whatever purpose you see fit. And, you will be able to write off that mortgage interest at tax time, too)
#2 Mortgage Points You Pay
Did you pay points when you did your mortgage refinance to lower the interest rate? You might be able to tax deduct them in April. ‘Points’ are simply prepaid interest. You are paying them up front so that you can enjoy a lower interest rate over the years. One point is 1% of the loan amount. So if you pay one point on a $200,000 loan that is $2,000 you are paying at closing. Points also can be called other things, such as loan origination fees, loan charges, discount points, and loan discounts. Note that if you pay points when you refinance your mortgage, you generally have to deduct those points over the life of the loan. So, if you have refinanced into a 15 year mortgage, you will then deduct part of the points for every year you have that mortgage.This is very different from when you buy your home; in that case, you are able to deduct all of the points in full in the year that you pay them.
#3 Property Taxes
Did you refinance close to when your property taxes are due? Then you might have paid property taxes when you closed the new loan. If you did, then you can deduct what you paid on your next tax return. However, remember that you only are able to deduct property tax payments that you made during that calendar year. You may not deduct any money that you paid into escrow for your future property tax payments.
#4 Private Mortgage Insurance Payments
If you have under 20% equity in your house, you will usually be paying mortgage insurance premiums. For many Americans who have loans that were taken out before 2007, you probably could not tax deduct your PMI payments. However, when you refinance, you should be able to deduct your new PMI premiums if you still have them. This deduction is available for people who itemize all of their tax deductions. Note that it will phase out for taxpayers filing married jointly who earn above $50,000 per year. However, you also should know that some things are not tax deductible when you are doing a mortgage refinance:
- Your closing costs for a mortgage refinance, which include appraisal fees, attorney fees, inspection fees, etc., generally are not tax deductible.
- However, when it comes to refinancing a loan on a rental property, you will generally be able to deduct your closing costs from your taxes. Closing costs, interest and points paid are all expenses of owning a rental property, and generally, they can be deducted from your taxes.
The federal tax code is very friendly to people who own their own home. If you rent, you are losing out on many tax advantages. When you refinance, you will be able to write off expenses that can easily save you a few thousand dollars at tax time. This can be a big plus for retired home owners who are ready to start reducing their monthly payment obligations as their income is getting lower or is now fixed at retirement. It is a good idea to talk to your tax advisor when you are refinancing your mortgage to ensure that you are able to take maximum advantage at tax time. Get more tax deductibility info from the IRS website.