What Is Reported to IRS for Mortgage Refinance?

If you pay a lender more than $600 in interest over the course of a year, the lender reports the payments to the IRS on form 1098 and sends you a copy. If you refinance your mortgage partway through the year and pay more than $600 interest on the new loan, then your lender submits two 1098s, one for each mortgage. After the year you refinance, your lender only has to submit one form, for the annual interest on your new refi loan.

Confusingly, "points" you pay when you close on your refi can refer to either an advance payment of some of your mortgage interest or to closing costs such as appraisals, legal fees and title fees. You can deduct the prepaid interest, but not the closing costs, and you can't deduct the prepaid interest immediately. Instead, you prorate the points over the life of the loan and deduct a little each year. Your lender doesn't report points to the IRS.

If you refinance a larger mortgage than you need to pay off the old one -- a "cash out" refinance in mortgage-speak -- and use your extra money to improve your house, the tax rules changes. If you use 25 percent of the refi amount to add a new roof, for instance, you can report 25 percent of the points to the IRS as a deduction for the year you refinance, instead of prorating. This only applies if points are a normal mortgage practice in your community, and if the points you paid are no higher than normal.

Your 1098 not only reports your deductible mortgage interest, but whether you're entitled to a deduction for mortgage-insurance premiums on either your original mortgage or your refi. If your deductible interest on the new mortgage is less than $600, you won't see it on a 1098, but you still report it to the IRS on line 10 of Schedule A. If you can claim any points in the current year, report them on line 12 and the insurance premiums on line 13.