Refinancing To Save Tax Dollars

Summary: Even though many people think that refinancing their home is an expensive proposition, the truth is that refinancing can saves homeowners hundreds of dollars on a monthly basis. In addition to saving money each month on your house payment, there are also tax benefits associated with refinancing your home loan. By making yourself aware of the potential tax benefits of refinancing and planning carefully, you can help keep a greater percentage of the funds you save in your ow...

Even though many people think that refinancing their home is an expensive proposition, the truth is that refinancing can saves homeowners hundreds of dollars on a monthly basis. In addition to saving money each month on your house payment, there are also tax benefits associated with refinancing your home loan. By making yourself aware of the potential tax benefits of refinancing and planning carefully, you can help keep a greater percentage of the funds you save in your own pocket. Itemize Your Deductions When you first finance or refinance your home, most of the money you pay each month goes toward the interest on your loan rather than toward reducing the principal balance. For many homeowners, taking advantage of itemized deductions allows them to save taxes because they are able to write off the interest paid in on their home loan. Spouses who file joint income tax returns are able to deduct up to $1 million of interest each year. If you had a mortgage for $300,000 and you refinance your home with a $350,000 mortgage, you can enjoy increased tax deduction benefits associated with the additional interest you are paying. Under Internal Revenue Service regulations, the amount of your new loan that replaces the original loan ($300,000) is home acquisition debt. The additional $50,000 of the new loan is classified as home equity debt. Interest paid on both types of home-related debt qualify as a legitimate tax deduction. A couple of caveats: Be certain that the home equity debt must be less than $100,000 and the total amount of debt on the home does not exceed the actual value of the property. Improve Your Home Many people refinance your mortgage for an amount higher than their original loan amount for the purpose of making improvements to their home. In this situation, homeowners are able to take an advantage of an additional tax deduction equivalent the portion of loan points paid during the initial year of the loan. This tax benefit covers all types of home improvements, assuming that that the improvement is within the scope of a reasonable improvement that has a positive impact on property value. Additionally, interest paid on money used for expenses not related to home improvement may also be deductible in certain situations. The Advantages and Disadvantages of Amortization When you pay points to buy down the interest rate on a home loan refinance, you are able to recover some of the money through tax deductions. Points paid on a refinanced mortgage are amortized over the life of the loan. The amount that you pay in points can be written off, in even amounts each year. If you end up selling your home before the loan is fully paid off, or if you refinance the home again, you are allowed to write off the remaining amount of the deduction in the year the home is sold or the loan is refinanced. Learn Tax Advantages To learn more about the tax advantages of refinancing your mortgage, read Home Mortgage Interest Deduction (IRS Publication 936). You should also speak with your tax advisor before making a decision. You can learn more about the tax benefits of mortgage refinancing from the IRS Publication 936, Home Mortgage Interest Deduction. It's also important to consult with your accountant or tax attorney to learn how refinancing your home loan can impact you and your tax liabilities.