Mortgage Origination Points
Every once in a while, we find a “sticky wicket” in the tax laws. This is one of those. With interest rates declining many people are refinancing their origination mortgages or taking money out with the refinance to invest back in a home with a home improvement project. Here are some of the rules that must be followed according to recent tax laws:
When you took your original loan to purchase your home, you may have had to pay “points” to get the interest rates down to a rate that calculated to a manageable payment. Those “points” were amortized and deductible annually over the life of that loan.
When you go to refinance, those “points” are either then fully deductible after the initial loan is paid off with the refinance or must be continued to be amortized over the life of the new loan. If you refinance with the same bank as your original you must continue the amortized deductions over the life of the new loan.
However, if you refinance with a new bank, you can deduct the remaining amounts of points in the year of the refinancing. Then you will amortize any new points over the life of the new loan.
If you take money out to improve your home, you may take the proportion of the points that applies to the extra cash out and deduct them in full the year of the new loan. The balance is deducted over the life of the new loan.