Tax Breaks for Refinancing

Are there any special tax breaks for people who refinance their mortgage this year?

Yes, there are. In addition to the regular write-offs that all homeowners have -- such as deductible mortgage interest and property taxes -- people who refinance their mortgage often overlook some tax breaks:

Deducting points paid. You can deduct the points paid to get a mortgage in the year you buy a home -- even if the seller paid the points for you. You can also deduct the points paid to refinance a mortgage, but the rules are trickier. Instead of writing off those points all at once, you must spread the deduction over the life of the loan. Say, for example,you took out a $250,000, 30-year mortgage and paid two points, or $5,000 (each point equals 1% of the loan amount). Because you're refinancing, you can deduct only one-thirtieth of those points every year -- just $166.67 per year for 30 years.

If you refinance that mortgage again, though, you can generally deduct the remaining points in the year that your loan is paid off with the second refinancing. So, in our example, if you had refinanced three years ago and deducted $500 of the $5,000 you paid in points, you could then deduct the remaining $4,500 balance in the year you refinance again. And each year you could deduct a portion of the points paid for the new loan -- one-thirtieth of the points paid when you refinance a 30-year loan again.

If you refinance with the same lender, however, you cannot deduct the remaining points in one year. Instead, they are added to the points charged on the second refinancing and deducted over the life of the loan.

Private mortgage insurance premiums. If you have less than 20% equity in your home, you usually have to pay PMI to get a loan -- especially now that piggyback loans are nearly impossible to get. Depending on when you purchased your home, those PMI premiums on your original loan might not be tax-deductible. But you can now deduct premiums for loans that were taken out in 2007 and later. This applies not only to private mortgage insurance but also to premiums paid for mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration and the Rural Housing Service.

If you took out your loan before January 1, 2007, you haven't been able to take the deduction. But you may finally qualify if you refinance your mortgage this year or next.

This deduction is available only to taxpayers who itemize their deductions, and it phases out as income rises above $50,000 for married taxpayers filing separate returns or above $100,000 for single filers, heads of household or married taxpayers filing jointly. The write-off is set to expire at the end of 2010, unless Congress extends the tax provision.

See Tax Breaks for Buying a Home for tax breaks for home buyers. Also see IRS Publication 530 Tax Information for Homeowners.