You can't claim your entire refi loan as a tax deduction, period. If you itemize deductions on Schedule A, you can write off the interest on your new mortgage, just as you could with the original loan. You can also write off points -- prepaid interest on the loan. If you opt for a cash-out refinance -- for example, you pay off your mortgage and take out enough additional money to buy a car or pay your college tuition -- you can't deduct interest on more than $100,000 of the extra debt.
Look through your tax records to see how many points from your previous mortgage you've written off already. You can either pay off points in the year you close or amortize them gradually over the life of the loan. If you chose the second option and haven't deducted them all yet, you can claim the remaining points in the year your refinance goes through.
Add in any penalties you paid for wrapping up your original mortgage early. Mortgage lenders use prepayment penalties -- 3 percent of the loan or six months' of interest, for example -- to compensate for the interest payments they lose when you refinance. You can treat your penalty -- which is usually stated on the mortgage note -- as if it were deductible interest.
Calculate this year's deduction for amortized points you pay for refinancing. For example, if you pay $3,000 in points and your mortgage runs 15 years, you can amortize $200 in prepaid interest for each year of monthly payments. With a refi, you don't have the option to take all the points up front, so you have to amortize.
Add all these amounts, and then report the total in the "Interest You Paid" section of Schedule A. You deduct these costs, along with any other itemized deductions, from your total income for the year.
- Your lender should send you a 1098 form at the end of the year reporting how much interest you paid on the loan.
- You can deduct interest on up to $1 million of mortgage debt. Above that figure, it's no longer a valid write-off. If you own more than one home, the $1 million applies to the total debt on all your houses combined.
- Some lenders use points to refer to closing costs that aren't prepaid interest. You don't get any deduction for those kinds of points.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.