If you refinance a mortgage, you may pay "points" to reduce the interest rate on your loan. The tax treatment of those points can be complicated.
Suppose, for example, you refinance a $200,000 loan and pay two points (2 percent), for a total of $4,000. You can deduct those points over the life of the loan. If you get a 30-year loan, you can deduct 1/30 of $4,000, or $133, each calendar year that the loan is outstanding.
When the loan is paid off, all of the points you have yet to deduct can be deducted. This might be the case if you refinance the loan again or if you sell the house.
Suppose you got a mortgage a few years ago and paid $4,000 in points. Since then, you have deducted $400 of those points. If you refinance a loan this year, you probably can deduct the remaining $3,600 ($4,000 minus $400) on your 2009 tax return. (The rules are different if you refinance with the original lender.)
In addition, if you refinance and pay points this year, you can deduct some of that payment this year. If your new loan is for 30 years (360 months), for example, and you refinance with six months left in the year, you can deduct 6/360 (or one 60th) of the points you paid this year, in addition to deducting any points from the previous mortgage.
