Tax Implications of Refinancing Your Home

Recently the government announced that the premiums on FHA loans would be cut by half a percentage point. While that doesn’t seem like a big deal, it can mean the difference of hundreds or thousands of dollars each and every year that you have a loan on your house. To take advantage of this millions of people are refinancing their homes, causing the biggest gains in mortgage applications in six years. If you do decide to refinance, how does that affect your taxes? Are there tax implications, good or bad, for refinancing your home?

Tax Breaks for a Refinance

The answer is not a straight, “Yes, refinance and collect on all of these great tax benefits!” Instead there are benefits to buying a home or refinancing your home. Here are just a few of the tax implications.

Prepaid Interest – In order to drop your interest even lower, you can prepay some of it. What means is that a large portion of your closing costs go toward this prepaid interest, as a result your monthly payments are lower. The good news is that prepaid interest is deductible from your taxes.

Property Tax – If you are refinancing, then you have already paid your property taxes. If you are buying a new home, you will likely need to pay some of the property taxes. This payment is likely to be wrapped up into your closing costs, or settlement fees. Property taxes can be deducted from your income taxes.

Mortgage Interest – Every year that you pay on your mortgage, you can write off the interest charges. However, if you refinance, you are going to be paying less in interest charges than before. This means that each year you will have less that you can write off, and you may need to start donating money elsewhere in order to keep your deductions above the standard deduction rate.

PMI – If you buy a house and your loan covers more than 80% of the value of the house, you will likely need to pay for private mortgage insurance. This protects the lender in case you default on your loan. The good news is that PMI payments are deductible. The bad news is that it’s an extra $60 – $150 per month that you get no benefit out of. A refinance could help you drop the PMI which saves you money, but also reduces your deductions.

Buying or Refinancing Your Home

Buying a house is likely the biggest financial commitment that you will ever make. The government has made the burden a little easier by offering a variety of tax deductions and breaks for those who are home buyers or refinances. As an accountant in Billings, Montana Practical Taxes knows and understands all of the tax implications of buying or refinancing a home. It may be in your best interest to have him do your taxes this year.

Practical Taxes is a full service accounting firm in Billings, Montana. If you need tax preparation work, nationwide online payroll services, business consulting services, or more, we can handle all of your needs!