Savings for Serial Refinancers

Did you refinance a home mortgage last year to take advantage of low interest rates? Well, if you paid points on the loan, you need to know how the tax law treats that cost of refinancing.

Refinancing points are not treated the same way points paid when purchasing a home. When a purchase of a principal residence is involved, points are fully deductible in the year paid. Because each point equals 1% of the loan amount, paying two points on a $250,000 mortgage costs $5,000 and translates to an immediate $5,000 deduction.

When you refinance, though, the rules aren't so generous. Instead, you deduct the points over the life of the loan. That means 1/30th a year in the case of a 30-year loan -- just $166 a year in the case of that $250,000, two-point deal. (And, of course, you don't get a full year's deduction for the first year, unless you happened to settle on New Year's Day, which means you have to prorate the write-off.)

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But what happens if the loan you refinanced in 2007 was one you had refinanced earlier? Well, the general rule is that any points not-yet-deducted on the first refinancing can be deducted in the year the loan is paid off with the second refinancing. That's a real money saver for serial refinancers -- and I know there are a lot of you out there.

But notice I said that's the "general rule." There's an exception that might deny you that big write-off.

The IRS says that if you refinanced the loan with the same lender -- as homeowners often do to hold down costs -- then the points from the first refinancing are not suddenly deductible. Instead they are to be added to the points charged on the second refinancing and deducted over the life of that loan.

Why the discrimination against homeowners who refinance with the same lender? I don't know. Maybe you should ask your representatives in Congress who make the law.

McCormally retired in 2018 after more than 40 years at Kiplinger. He joined Kiplinger in 1977 as a reporter specializing in taxes, retirement, credit and other personal finance issues. He is the author and editor of many books, helped develop and improve popular tax-preparation software programs, and has written and appeared in several educational videos. In 2005, he was named Editorial Director of The Kiplinger Washington Editors, responsible for overseeing all of our publications and Web site. At the time, Editor in Chief Knight Kiplinger called McCormally "the watchdog of editorial quality, integrity and fairness in all that we do." In 2015, Kevin was named Chief Content Officer and Senior Vice President.