With recent rate hikes, the market for mortgage refinancing has slowed down a lot. But a lot of people refinanced in 2005 and can get tax breaks because of it.
If you refinanced your home, you can get a tax break for points.
In the last few years, mortgage rates have been so low that it's hard to believe. Anyone who owns a home already knows this. But the nominal rates did cause a huge boom in the mortgage business. As interest rates went up and down, a lot of people refinanced to save a little bit more on their mortgages. Heck, many people have done it more than once! With mortgage interest rates going up, this trend of quickly refinancing has come to an end.
If you refinanced to get lower rates this past year, I have good news for you. Not only did you get lower rates, but you may also have more tax breaks that you can use to lower your tax bill.
Homeowners often have to pay points in order to get a mortgage, whether it's a new one or a refinance. These nasty little fees are usually paid up front and are a certain percentage of the loan. Luckily, points can be taken off. Most of the time, you can deduct points as part of the mortgage interest deduction, which is one of the things that makes our real estate market so attractive. How the points are taken off depends on the type of loan, though.
If you got a new home loan, you can write off the full amount of the points. To do this, you must list each item on your tax return, though. Since you should also be able to deduct the interest you pay on the mortgage, this is an obvious choice.
But things are a little different if you refinanced a home loan you already had. Yes, you can take the points you paid on the refinance off your taxes. You have to pay them off over the life of the loan, which is a shame. In reality, you can't deduct the entire $3,000 you paid in points when you refinanced last August. Instead, you can take a portion of the $3,000 off your taxes. The percentage is calculated by dividing the value of the points by the number of months of the loan. This tax disadvantage can be fixed in two ways.
If you refinanced twice in 2005, which some of you did, you can deduct the full amount of the points on the first refinance. Why? You can do this because the first refinance was done in 2005 and lasted less than a year.
If you used a refinance to make home improvements, you may also be able to deduct points right away. It's a bit complicated and not what this article is about. If you actually used the money from the refinance to make improvements to the house and can prove it with receipts, talk to a tax expert right away to get all your points written off.
