Points and tax deductions

You should be aware of an Internal Revenue Service (IRS) ruling with respect to points paid solely for refinancing your home mortgage. IRS regulations require that interest (points) paid up front for refinancing must be deducted over the life of the loan, not in the year you refinance, unless the loan is for home improvements. This means that if you paid a certain number of points, you would have to spread the tax deduction for those points over the life of the loan. If, however, the loan or a portion of the loan is for home improvements, you may be able to deduct the points or a portion of the points. Check with the IRS regarding the current rulings on refinancing, particularly if you are using the new loan to make home improvements

A "point" represents a percentage of the loan amount (one point equals 1 percent of the loan), e.g., one point on a $150,000 loan would be $1,500.

Don't forget to count your unused portion of your points from your prior loan as a tax deduction. If you took a loan out last year and paid points you have to spread those points out over the life of the loan. However if you then refinance you can take the unused portion of those points and count them as a tax deduction for the current year.