Mortgage Calculator Refinance

It seems like every time you turn around these days there are new tax codes and tax laws being implemented in regards to property acquisition, sale and mortgage loans.  In most cases, these tax law changes are meant to benefit the homeowner, making it more appealing for those with good enough credit to obtain a new mortgage to go for it.

The tax advantages of home ownership can often make a big difference in the amount of income taxes you owe – or how big a refund you get every year.  Especially when a new mortgage is taken out. Keep in mind that while there are a variety of tax advantages to refinancing your current mortgage, some of these tax breaks are only temporary and must be discussed with a professional accountant to ensure that you do indeed qualify for them in a given year. For that reason, we will only concentrate on the permanent tax benefits offered by the Internal Revenue Service (IRS) when it comes to home ownership; mortgages and mortgage refinancing and leave the temporary ones to the professionals to explain:

Interest Deductions

The largest tax deduction you will likely see in the first few years after refinancing your current mortgage is in regards to the in the interest deductions made available for mortgages.  Since a mortgage refinance is a brand new loan taken by the homeowner on the property, the interest payments will likely be much higher than the principle payments for the first few years of the loan.  This may sound like bad financial news since you have already been paying high interest amounts on your current mortgage; but in reality it can have a good impact on your tax bill, thus saving you even ore money in the long run.  

Right now the IRS allows homeowners to deduct the interest payment on mortgages up to $1 million.  The result of those higher interest payments now: more money in your pocket at tax time, and since you will likely pay much less each month after you refinance, it won’t hurt your budget at all to pay more interest now.

One caveat here:  you are only allowed to deduct that mortgage interest if you itemize your deductions on your tax return. Taking a standard deduction will not allow this important tax benefit.

Loan Point Deduction

If your lender required you to pay any loan origination points (a percentage of the loan amount) when you refinanced your loan, you should be able to deduct part of that amount on your next income tax return.  Keep in mind though, that while these points can be deducted in full when you first purchase your home, that amount must be amortized over the length of the loan when a refinance occurs.  Still, it offers some tax savings from year to year and if you sell or pay off your home early, then you can deduct the remaining amount in full that tax year.

Home Improvement Costs

Home improvement costs can sometimes be deducted from your income tax bill if you borrowed more money in your refinance loan than the original mortgage and used the difference to make needed repairs or improvements to your property.  Almost anything counts here including renovations, repairs and additions, as long as it increases the value of your home.

Prepayment Penalties

If your lender charged you a prepayment penalty for paying off your current mortgage with a loan refinance, than you may be able to deduct that penalty amount as interest on your tax return.

Mortgage Insurance Premiums

For those with less than 20% equity in their home, a lender may require the purchase of pricey mortgage insurance premiums (PMI), which equals about 1% of your loan amount.  Since 2006, the IRS has allowed these premiums to be deducted as interest on your income tax return.

Cancelled (or Forgiven) Mortgage Debt

In an effort to help distressed homeowners strike a better deal with their mortgage lenders, the Federal Government instituted The Mortgage Forgiveness Debt Relief Act of 2007 which states that taxpayers do not have to taxes on any loan amount forgiven during a modification, restructuring or refinancing as long as the property is your primary residence.

Although these are just a sampling of the tax benefits of refinancing your home, they can add up to big savings when income tax time rolls around.  To find out about other tax benefits you may be eligible for when you refinance your mortgage, contact your local tax adviser or check out the government brochure, Publication 936, Home Mortgage Interest Deduction, offered by the IRS on its website.