Just as with a purchase mortgage, in a refinance mortgage a borrower may be required to pay points as part of the closing costs of the refinance loan. Alternatively, the option to pay points or not to pay points could be left to the borrower to decide, with advantages and disadvantages to each. One “point” is equals one percent of the total refinance mortgage amount.
There are two types of refinance points: origination points are added to closing costs to help pay for the lender’s loan expenses; discount points are added to closing costs as a trade-off to help the borrower get a lower interest rate. In short, by agreeing to pay more up front for a loan in the way of refinance points at closing, a borrower receives better loan terms in the way of a lower interest rate or, in cases, smaller monthly payments and/or a longer loan term.
Can You Get Refinance Tax Credit?
All homeowners refinancing their home are looking for every mortgage refinance tax deduction they can get (at least the wise ones are). So upon understanding what refinance points are, the question becomes: “Are refinance points tax deductible?” And the answer is yes and no.
Yes, refinance points are tax deductible. But no, they are not deductible in full the year paid. Rather, the refinance tax credit you get for paying points at closing costs is amortized into your loan, meaning that you pay it off in increments with each monthly payment over the life of the loan. Which means, they’ll be subject to the same interest rate as the rest of your payment.
However, if you do decide to pay refinance points, and later you prepay your loan balance in full before your loan term ends, or if you pay refinance points and you later refinance your mortgage once again, , you will then, for the year of termination of your “existing” refinance mortgage, be able to claim a refinance points tax deduction on the remaining points balance.
One more exception to the above rule is if you refinance your home in conjunction with the purchase of a new home or with making improvements on the home being refinanced, you may be able to deduct up to all of the refinance points paid on the same year’s taxes.
What Does That Mean For Your Refinance?
If you can afford to pay more up front in closing costs, than refinance points are an excellent way to save yourself money over the long term. If you cannot afford to pay more up front in closing costs, however, then finding a refinance mortgage that allows the option of not paying points is one way to save money now, in the short run. For some people, that means the difference between being able to refinance their home mortgage now, and not being able to.