When refinancing, how is the cost of points deducted compared to a purchase loan?

When refinancing a home loan, the treatment of points—fees paid at closing to lower the interest rate on a loan—differs from that of a purchase loan. In the case of a refinance, points are typically amortized over the life of the loan rather than being fully deductible in the year of refinancing. This means that if a homeowner pays points to acquire a lower interest rate on their refinance, they can deduct those points on their tax return over the period of the loan, usually 30 years for a standard mortgage.

This approach contrasts with purchasing a home, where points may sometimes be deductible fully in the year they are paid, depending on the circumstances. By amortizing the points for refinances, taxpayers can spread the deduction across several years, aligning the tax benefit more closely with the loan period. This amortization reflects the cost of borrowing over time, recognizing the use of those funds rather than providing an immediate full deduction. Thus, understanding the nuances of these deductions is essential for effective tax planning related to mortgage financing.