Residence Refinance Points
Refinanced to Make Substantial Home Improvements
If an existing acquisition debt loan is refinanced to obtain funds for home improvement(s), and the homeowners incur points as part of the transaction, the points must be proportionately allocated between the refinance of the home and the substantial home improvements.
The portion allocated to refinancing the existing loan is amortized over the life of the loan while the home improvement portion is currently deductible. The points still must meet the general requirements for the deductibility of pre-paid interest for a primary residence.
Example – Loan for Home Improvements & Refinance of the Existing Home Loan – Emily and Jay have a $200,000 existing acquisition debt on their home. They refinance the existing loan into a new $300,000 primary loan and pay points in the amount of $6,000. Emily and Jay will use $100,000 to make substantial home improvements within a reasonable amount of time. 2/3 of the new loan was used to retire the old loan. Thus, two thirds of the points, $4,000 ($6,000 x 2/3), must be amortized over the life of the loan.
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Since $100,000 was (or will be within a reasonable time) used to make substantial home improvements, the balance of the points, $2,000 ($6,000 - $4,000), is currently deductible.
With interest rates recently at record lows, the number of home refinances substantially increased, raising questions related to points incurred as part of the refinance. Generally, points just to refinance an existing loan must be amortized over the life of the loan.
Where existing points from a prior refinance are being amortized and the loan is refinanced, the balance of previously amortized points is treated as follows:
Refinance With a Different Lender
When a mortgage is refinanced with a different lender or paid off, the balance of any points being amortized becomes fully deductible in the year the loan is retired.
Refinance With Same Lender
IRS Pub 936 (2021), Page 8, indicates that if a mortgage is refinanced with the same lender the remaining unamortized balance of the points is not currently deductible. Instead, the remaining balance must be amortized over the life of the new loan.