Are Refinancing Costs Tax Deductible?

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The short answer to “are refinancing costs tax deductible?” is that most ordinary lender and settlement fees are not. Federal tax law separates true interest, including qualifying discount points, from charges for appraisals, documents, reports, insurance, and other services.

That distinction matters more than the label on a closing disclosure. A single refinance can contain a small deductible interest component, points that are spread across future years, and several fees that never become an itemized interest deduction.

Refinance points are prepaid interest

Discount points are amounts paid to obtain a mortgage rate and are treated as prepaid interest when they satisfy the federal requirements. Section 461 of the Internal Revenue Code generally allocates prepaid interest to the periods it covers.

For a refinance, Publication 936 generally requires deductible points to be spread ratably over the term of the new loan. A 15-year refinance therefore uses the scheduled payment periods over that 15-year term rather than treating the entire amount as interest paid in the closing year.

The accelerated deduction commonly associated with points on a home purchase does not automatically apply to refinancing. A limited exception can apply to the portion of refinance points connected with substantially improving the main home when the detailed statutory and IRS tests are satisfied.

Service fees do not become interest because a lender calls them points

Federal guidance looks at what a charge pays for. An amount imposed for an appraisal, credit report, inspection, title work, legal work, notarial service, or mortgage-document preparation is a service fee rather than deductible interest.

The same rule prevents a lender from converting a separate service cost into interest simply by including it in an extra point. Publication 936 illustrates this distinction by separating prepaid-interest points from a point charged in place of fees ordinarily stated separately.

These charges are common mortgage fees, but payment at a refinance closing does not make them a federal tax deduction. Publication 530 also states that specified costs of obtaining or refinancing a mortgage, such as a lender-required appraisal or credit report, are not added to the home’s tax basis.

Mortgage interest still has to qualify

Deductible home mortgage interest is an itemized deduction, so it does not provide an additional federal benefit when the standard deduction is used. The debt must also be secured by a qualified home in which the taxpayer has an ownership interest.

Section 163 limits the deduction for personal interest to defined exceptions, including qualified residence interest. For a refinance, the old qualifying acquisition debt generally retains that character only within the statutory refinancing limits.

A cash-out amount receives different treatment from the balance used to replace the old qualifying mortgage. Interest on the additional proceeds is not qualified residence interest unless the money is used to buy, build, or substantially improve the home securing the debt and the other federal requirements are met.

Those debt-use and dollar-limit rules belong to the broader mortgage interest deduction. They determine whether an interest-like cost is deductible before the timing rules for points become relevant.

What happens to points from the old mortgage

Points from an earlier mortgage may still have an undeducted balance when that loan ends. If the old loan is paid off or refinanced with a different lender, federal guidance generally permits the remaining spread points to be deducted in that year.

A same-lender refinance follows a different timing rule. The undeducted balance from the old points continues over the term of the new loan instead of becoming fully deductible at once.

Records separate the deductible amount from the rest

The closing disclosure can identify discount points, prepaid daily interest, lender charges, and third-party service fees, while Form 1098 reports mortgage-interest information under separate reporting rules. A refinance point may require Schedule A treatment even when it is not shown as a deductible point on Form 1098.

For 2025 federal returns, the Schedule A instructions place qualifying home mortgage interest and points among itemized deductions and provide a separate line for deductible points not reported on Form 1098. The deductible amount depends on the character of the charge, the use of the loan proceeds, the applicable debt limits, and the portion allocable to that tax year.

Sources

• 26 U.S.C. § 163, qualified residence interest rules
• 26 U.S.C. § 461(g), prepaid-interest timing
• IRS Publication 936, Home Mortgage Interest Deduction
• IRS Publication 530, Tax Information for Homeowners
• IRS Instructions for Schedule A (Form 1040)
• IRS FAQ on allocating mortgage points over the loan term