Will refinancing my home impact my income tax?

UPDATED: Jul 20, 2023Fact Checked

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UPDATED: Jul 20, 2023

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UPDATED: Jul 20, 2023Fact Checked

A home refinance may or may not have an impact on your income taxes. Whether or not it does will depend on a variety of factors.

One factor is your mortgage. If it is relatively new, meaning, you have only had the mortgage contract for a few years, you are probably still making payments that are going toward the interest of the mortgage loan instead of the balance of the mortgage itself. Any payments that are made to pay off interest are tax-deductible and thus will impact your income tax return. Later in the loan’s life, the payments will be going toward the balance of the mortgage loan, or at least part of them will, and the portion of the payment that goes toward the balance is not tax-deductible on your income tax return.

Keep in mind that this only applies if you itemize deductions on your income tax return. Itemizing deductions is what makes your interest payments on your home mortgage loan tax-deductible. Therefore, if you apply for a home refinance and get a lower interest rate, you will be paying less interest on the home mortgage loan, which will equal out to less tax-deductible value on your income tax return when it comes time to do your taxes.

However, if you are already in the later stages of your home mortgage loan and you refinance into a new, longer mortgage, then, again, more of your payments might start going to interest. With more interest paid, you could potentially have a larger mortgage interest tax-deduction available to you.

Because it can be tricky to assess which is the best financial decision: deducting less in favor of lower interest, or paying more interest in favor of greater deductions, your best bet is to speak to a real estate attorney before you apply for a home refinance. Your lawyer can also explain to you how much of an impact on your income tax your decision will make.

Case Studies: Understanding the Impact of Home Refinancing on Income Tax

Case Study 1: New Mortgage With Lower Interest

John, a homeowner, decided to refinance his existing mortgage to take advantage of lower interest rates. Since John had recently obtained his original mortgage, a significant portion of his payments went toward interest. As a result, he could deduct the interest paid from his income taxes by itemizing deductions. However, after refinancing into a new mortgage with a lower interest rate, John’s interest payments decreased. Consequently, the amount of interest he could deduct on his income tax return also reduced.

Case Study 2: Refinancing Into a Longer Mortgage

Sophia had been paying off her mortgage for several years and was in the later stages of her loan. She opted to refinance into a new, longer mortgage. This decision meant that more of her monthly payments would once again go toward interest. By doing so, Sophia potentially increased the amount of mortgage interest she could claim as a tax deduction on her income tax return.

Case Study 3: Seeking Professional Advice

Michael was considering a home refinance but was uncertain about its potential impact on his income taxes. To make an informed decision, he sought advice from a real estate attorney. The attorney thoroughly analyzed Michael’s current mortgage terms, proposed refinancing terms, and tax situation. Based on this analysis, the attorney explained the potential implications of both scenarios. Michael used this valuable advice to understand how each option would affect his financial goals and make an educated decision regarding his home refinance.

 

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Jeffrey Johnson

Insurance Lawyer

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Insurance Lawyer

Mary Martin

Published Legal Expert

Mary Martin has been a legal writer and editor for over 20 years, responsible for ensuring that content is straightforward, correct, and helpful for the consumer. In addition, she worked on writing monthly newsletter columns for media, lawyers, and consumers. Ms. Martin also has experience with internal staff and HR operations. Mary was employed for almost 30 years by the nationwide legal publi...

Published Legal Expert

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

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