It’s widely know that this is an outstanding time to refinance your home if you are financially able and if your current mortgage situation makes it a sensible move. However, before deciding to refinance, there are a couple of tax consequences you need to consider:
Cash-out refinancing. If you borrow more than you need to cover your outstanding mortgage balance, the tax treatment of the cash-out portion depends on how you use the excess cash. If you use it for home improvements, it’s considered acquisition indebtedness, and the interest is deductible subject to a $1 million debt limit. If you use it for another purpose, such as buying a car or paying college tuition, it’s considered home equity debt, and deductible interest is subject to a $100,000 debt limit.
Prepaying interest. “Points” paid when refinancing are usually amortized and deducted over the duration of the loan, rather than being deductible at the outset of the mortgage. If you’re already amortizing points from a previous refinancing and you refinance with a new lender, you can deduct the unamortized balance in the year you refinance. If you refinance with the same lender, you must add the unamortized points from the old loan to any points you pay on the new loan and then deduct the total over the life of the new loan.
Are you a bit confused yet? Fret not; we can assist you in understanding exactly what the tax consequences of refinancing will be for you and for your individual situation. Contact us today at 407.892.1066.