What exactly is a mortgage versus a refinancing of your home?
A mortgage is a legally bound, interest bearing contract between a home owner and a bank or other creditor. When taking out a mortgage on your home, you get a loan on your house/property. During the course of the mortgage you are making monthly payments to the creditor. During that time, the creditor will hold the title or deed of your house or property.
What does it mean to refinance?
A refinance is a new mortgage to replace the other one. These are made to get a better interest rate or loan term. The original loan is paid off by the creditor of the refinance and a new loan is created.
Refinancing a mortgage requires a tricky balancing act. On one hand, a home refinance will almost certainly save you a percent of the total mortgage, possibly adding up to thousands of dollars over the years.
On the other hand, refinancing requires some kind of upfront push. In the short term, it is a potentially expensive switch, regardless of the potential savings over the course of the next few years.
There is another cost involved with mortgages and refinancing that often goes unnoticed or undetermined until the process of the mortgage or refinance loan has begun. These are costs related to closing.
More on Closing Fees
For borrowers, closing fees are an almost inevitable part of the lending process if the property is deemed a personal property. Closing costs can be considered business operating expenses and can be written off.
As we are coming upon tax season, some homeowners are wondering if the closing costs on a mortgage or refinance loan can be tax deductible. The short answer is yes, but not always to the degree one would hope, and this may not be the case for every home owner.
The biggest tax deduction is usually the interest that you must pay on your loan. There are certain criteria that must be met in order to claim these deductions. The loan must be for your primary residence or secondary home. Home interest tax deductions are not applied to owners utilizing the property as an active rental.
In general, the same tax deductions are available when you’re refinancing a mortgage as when you’re taking out a mortgage to buy a home. The best advice would be given by your CPA on the best course of action to maximize your tax deductions.