Tax Implications of Mortgage Refinance: What Homeowners Need to Know

A mortgage refinance is when you replace your old mortgage with a new one that has better terms for your unique situation and goals.

By refinancing, you can update the terms of your loan to help you own your home sooner, or tap into equity to get cash to use for various needs. Before you go ahead and pursue this strategy, you should familiarize yourself with the tax implications. Here are some important things to know about taxes and refinancing. 

Tax deduction for mortgage interest

The mortgage interest tax deduction applies to both original mortgages and refinance loans. While most homeowners qualify for the deduction, you can only claim it if you itemize your taxes. As of 2024, the Internal Revenue Service (IRS) will allow you to deduct interest on the first $750,000, or $375,000 if you’re married and filing separately.      

It’s up to you to decide whether it makes more sense to itemize or take the standard deduction. For tax year 2024, the standard deduction is $14,600 for single filers and $29,200 for married taxpayers filing jointly. It’s a good idea to consult a tax professional or financial advisor for more information on the mortgage interest tax deduction and guidance on whether it’s a smart move in your situation. 

What happens if you refinance a rental property?

Tax rules are different if you refinance a mortgage on a rental property. The IRS counts the rent you receive as taxable income, meaning you must report it on your tax return. Fortunately, the funds you spend to earn that income can often be deducted from your rental income. This means you may be able to deduct interest as well as closing costs and fees.

How does a cash-out refinance affect taxes?

If you opt for a cash-out refinance to tap into your home equity, you’ll receive in cash the difference between the value of your home and the outstanding loan balance. Since you must pay back the money you receive with a cash-out refinance, it’s not considered taxable income. 

However, if you use the proceeds from a cash-out refinance for a capital home improvement, you may be able to deduct the mortgage interest from your taxes. Some examples of capital home improvements include installing a fence, adding a swimming pool, repairing your roof, updating worn windows, or incorporating a home addition, like an office or bedroom.

Tax implications for home equity loans or HELOCs

Home equity loans and home equity lines of credit (HELOCs) are secured loans that use your home as collateral. As long as you have sufficient equity in your home, you can put the proceeds toward just about any expense. However, to deduct the interest you pay on a home equity loan or HELOC, you must use the funds to “buy, build or substantially improve” your home. 

This means if you use the money to cover a car repair or vacation, for example, then you won’t be able to deduct the interest. Note that in 2026, the IRS will allow you to deduct home equity loan or HELOC interest for other uses, like repaying credit card debt or similar types of personal expenses.

Can you deduct mortgage or discount points?

When you buy discount points (or mortgage points), you “buy down” the interest rate on a mortgage. Through this strategy, you can reduce your monthly mortgage payment and overall interest charges. Typically, one discount point is equal to 1% of the mortgage amount. If you paid for points during your mortgage refinance, you might be able to deduct them if you meet certain requirements. 

If you’re not eligible for a deduction the year you pay for the points, you typically can claim it over the life of your loan. For example, if you spent $3,000 on mortgage points for a 15-year refinance, you can potentially deduct $200 per year until you pay your loan off. 

Will refinancing affect your property taxes?

Your property taxes depend on your local tax authority and its valuation of your home. For this reason, a traditional rate-and-term mortgage refinance won’t have a direct effect on your property taxes, even if you receive a higher appraisal. However, if you take out a cash-out refinance and use the funds toward a large renovation, the project may significantly change or expand your home and, in turn, warrant a property tax reassessment. 

Also, your new loan may have terms that impact how you pay your property taxes. Depending on the lender and mortgage, you may owe them every month along with your mortgage payment, or twice a year separate from your monthly mortgage payment. Be sure you understand how property taxes are paid before you commit to a refinance. 

Are closing fees tax deductible?

If you decide to refinance your mortgage, you’ll likely have to pay closing costs, which are typically anywhere from 3% to 6% of your loan amount. These costs usually include origination fees, appraisal fees, title search fees, and other related fees. Generally speaking, closing costs are not tax deductible as the IRS views them as part of your home buying costs, not an expense that’s tied to your home use. The only closing costs that might be deductible in certain situations are mortgage interest or real estate taxes. You won’t be able to deduct service-related closing costs like appraisal fees and title insurance fees. Always speak with a tax expert if you have any questions.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.

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