Tax Considerations When Refinancing a Mortgage

Tax Considerations When Refinancing a Mortgage

For many homeowners the key goals of mortgage refinancing are to lower the interest rate and reducing monthly payments. When a homeowner gets a lower interest rate there is usually the opportunity to refinance the mortgage to take advantage of the lower interest rate. However, a lower interest rate does not automatically translate into long term savings. Homeowners must carefully consider the amount of money they will be savings over the course of the loan in relation to the amount of money they will be spending to refinance the mortgage. When the closing costs associated with refinancing are larger than the savings, refinancing may not be wise refinancing can also have financial implications associated with tax options. It is also not a good idea to refinance a mortgage if you need to sell your house before you break even on your payment savings compared to your closing costs.

Paying Less Interest Yields a lower Tax Deduction

In states that have an income tax, homeowners are permitted to deduct the amount of taxes they pay on their mortgage when filing their tax forms. This, combined with the federal tax deduction, is usually a substantial deduction for homeowners who have owned the home for the entire tax year. Those who refinance their mortgage may end up paying less money each year in taxes on the mortgage. While this is great in the long run, it can adversely affect the homeowner’s tax return.

Consider a situation where a homeowner is located just above the cut-off for a higher tax bracket. As all ready discussed, refinancing may result in the homeowner paying less money in taxes each year. This means the taxpayer will be able to make a smaller deduction this year now fall above the tax bracket they previously fell below. When this happens the homeowner may find themselves paying significantly more in taxes.

Consult a Tax Specialist

Determining the impacts of taking a lower home mortgage deduction on a tax return can be a rather tricky process. There are a number of difficult equations involved that can make it easy to make mistakes when trying to determine the consequences of paying less in taxes on the mortgage. For this reason, the homeowner should consult a tax accountant when determining whether or not refinancing is worthwhile because a tax specialist can provide information regarding the impact of paying less in interest.

In selecting a tax preparation specialist, homeowners should seek out referrals from friends and family members. This can be helpful because trusted friends and family members are only likely to recommend professionals they feel are knowledgeable, trustworthy and good at what they are doing. A tax preparation specialists should have all of these qualities but should also be well versed in the area of tax benefit analysis / comparisons. This will enable the tax preparation specialist to make all of the right decisions when considering the needs of the homeowner and whether or not a mortgage refinance will be beneficial.

Online Calculators

For homeowners that do not know a tax preparation specialist or for homeowners that are unable to afford the consulting services of these individuals, there are online calculators that homeowners can use to determine if a mortgage refinance makes sense. These calculators are available all over the Internet and can be used to determine the tax ramifications to refinancing. These calculators ask the user to enter specific data that then returns results regarding the amount the homeowner will pay in taxes during the year if he refinances. Additionally the homeowner can run these equations several times using different scenarios to consider a number of different benefit models.

Copyright 2007 Mark V. Schwartz - The Internet Real Estate Center

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