Will My Income Taxes Be Affected if I Refinance My Home Mortgage?

Your income taxes may be affected by refinancing your mortgage. However, this will depend on whether you are paying any interest in your mortgage payments, and whether you list your mortgage payments as itemized deductions on your tax return.

If your mortgage is relatively new, you are most likely paying either only the interest on the mortgage, or a very high interest-to-principal ratio. The interest you pay on your mortgage is tax deductible, and can be listed in the itemized deductions portion of your income tax return. However, if you have a short-term mortgage, or have been making mortgage payments for many years, your payments will probably be applied solely to the principal of the mortgage. Unlike the interest paid on a mortgage, the payments that are applied to the principal cannot be written off from your income taxes.

If you take advantage of deducting your high-interest payments from your income taxes, then you may want to weigh the benefits of refinancing your home. Refinancing a newer mortgage will often mean a lower interest rate on your mortgage. If your mortgage is only several years old, refinancing will often enable you to pay more of the principal of the mortgage through your monthly payments. However, if the interest goes down on your payments, this means that you lose the benefit of deducting this interest from your income taxes.

On the flip side, refinancing a short-term mortgage into a longer term mortgage may end up benefiting you financially. While you will ultimately pay more interest on a long-term mortgage, you will also be able to deduct these interest payments from your income taxes.

If you are considering refinancing your home, you should first contact a tax professional in your area. It may be tempting to get out of making interest-only payments, and it may be daunting to go from paying only your principal, to paying high-interest payments, but these changes in your mortgage may have a big effect on other areas of your finances. A tax attorney or financial planner can help you determine whether refinancing your home is a smart financial decision or not.