Home Loans Refinance and Points

Just as with a purchase home loans, in a refinance mortgage a borrower may be required to pay points as part of the closing costs of the refinance loan. Alternatively, the option to pay points or not to pay points could be left to the borrower to decide, with advantages and disadvantages to each. One “point” equals one percent of the total refinance mortgage amount, so a $200,000 loan with two points would have $4,000 in fees.

For the purposes of tax deductions, there are two types of home loans refinance points: origination points are added to closing costs to help pay for the lender’s loan expenses and discount points are added to closing costs as a trade-off to help the borrower get a lower interest rate. In short, by agreeing to pay more up front for a loan in the way of refinance points at closing, a borrower receives better loan terms in the form of a lower interest rate. With a lower rate, the borrower ends up with a more affordable monthly payment.

Can You Get Refinance Tax Credit?

All homeowners refinancing their home are looking for every mortgage refinance tax deduction they can get (at least the wise ones are). So upon understanding what refinance points are, the question becomes: “Are refinance points tax deductible?” And the answer is yes and no.

Yes, refinance points are tax deductible. But no, they are not deductible in full the year paid. Rather, you will need to remember to spread the deduction over the life of the loan. Accountants call this process “amortization.” Let’s use the above $200,000 mortgage with $4,000 in points as an example. If it is a 30-year loan, you would divide the $4,000 in points by 30 to get your annual deduction of $133.33.

Taking your Refinance Mortgage Tax Deduction More Quickly

If you do decide to pay refinance points, and later you prepay your loan balance in full before your loan term ends, or if you pay refinance points and you later refinance your mortgage once again, you will then, for the year of termination of your “existing” refinance mortgage, be able to claim a refinance points tax deduction on the remaining points balance.

Another way to accelerate your tax deduction is to take out a cash-out refinancing loan and spend a portion of the proceeds on improving your home. Any portion of the points that relate to the home improvement costs can be deducted up front. For example, If you spent $50,000 of the $200,000 refinance that we’ve been using as an example on an addition, you’d be able to write off $1,000 of your $3,000 in points in the first year. The remaining $3,000 would get spread over 30 years at $100 per year.

One more exception to the above rule is if you refinance your home in conjunction with the purchase of a new home or with making improvements on the home being refinanced, you may be able to deduct up to all of the refinance points paid on the same year’s taxes.

What Does That Mean For Your Refinance?

If you can afford to pay more up front in closing costs, than refinance points are an excellent way to save yourself money over the long term. If you cannot afford to pay more up front in closing costs, however, then finding a refinance mortgage that allows the option of not paying points is one way to save money now, in the short run. For some people, that means the difference between being able to refinance their home mortgage now, and not being able to. Generally speaking, paying points is an excellent idea if you will be staying in your home and keeping your mortgage for more than seven years. Taking out a no-points loan makes more sense if you plan to sell or refinance your home in a relatively short period of time.

Considering home refinance for your home loan? Contact our mortgage broker in San Ramon.