Refinancing your home loan may have tax benefits

Have you taken advantage of falling interest rates and refinanced your mortgage this year?  If so, don't overlook the following tax deductions.

Deduct loan points.  Most lenders charge points, also known as a loan origination fee, on home loans.  If you itemize, you can generally deduct points paid on a refinancing, but not all in the first year.  Instead you must spread your deduction pro rata over the life of the new mortgage.  To qualify, paying points must be an established practice in your area, and the amount paid can't be more than what is normally charged in the area.

If you've refinanced in the past, you could be eligible for another deduction.  When you pay off a prior refinancing, you can immediately deduct any remaining points from the previous mortgage.

Maybe your refinancing served two purposes.  Perhaps you refinanced your home to get a lower interest rate or shorter loan term and also to tap your home's equity.  To the extent that you used the loan proceeds to pay for home improvements, points attributable to the home improvement portion can be deducted immediately.  Any remaining points must be deducted pro rata over the loan's term.

Look for other deductions.  If the lender charges a prepayment penalty for paying off the previous loan early, you can generally deduct the amount paid.  Most other closing costs, such as appraisal or title insurance fees, are not deductible.  However, you should bring your loan documents to your tax appointment because there could be additional deductions.