When you refinancing a home mortgage with a dollar-for-dollar replacement loan, all the interest will be deductible. Say your current loan balance is $250,000, on a 7 percent loan. If you refinance with a $250,000, 6 percent loan, all the interest will be tax deductible, as long as all of your mortgage debt is not over $1 million.
Some home owners often refinance for larger amounts and take cash from the deal. Say your home is appraised at $400,000 and your current loan balance is $300,000. You might get a loan for $320,000: 80 percent of your home’s value mortgage. If so, you’d pay off the old $300,000 loan and walk away with $20,000.
If you use that $20,000 for home improvements, all the interest on the $320,000 loan will be tax-deductible. If you use that $20,000 for other purposes, that $20,000 will be home equity debt; you generally can deduct the interest on up to $100,000 of home equity debt, no matter how you spend the money.