What Mortgage Closing Costs Are Tax Deductible on a Refinance?

Points Are Tax Deductible with Important 2026 Rules

While most refinance closing costs cannot be tax deducted, points paid on your mortgage refinance are tax deductible, though the rules differ significantly from purchase mortgages. Points (also called origination fees or discount points) are paid to reduce your interest rate—often costing several thousand dollars, making this a valuable tax deduction when properly claimed.

How to Deduct Refinance Points in 2026:

To deduct refinance points, you must itemize deductions using Schedule A on your Form 1040. For 2026, this only benefits taxpayers whose total itemized deductions exceed the standard deduction of $31,500 (married filing jointly) or $15,750 (single filers). With approximately 90% of taxpayers now using the standard deduction following the 2017 Tax Cuts and Jobs Act, many homeowners receive no tax benefit from refinance points.

Amortization Requirement:

Unlike points paid when purchasing a home (which are fully deductible in the year paid), refinance points must be amortized over the loan’s life—whether 15 or 30 years. For example, paying $3,000 in points on a 30-year refinance allows deducting only $100 annually ($8.33 monthly) over 360 months. If you refinance again or sell before the loan term ends, you can deduct all remaining unamortized points in that year.

Cash-Out Refinance Exception for Home Improvements:

If you use cash-out refinance proceeds for substantial home improvements (additions, renovations, major repairs), the portion of points attributable to those improvements becomes fully deductible in the year paid. The improvement must add value to your home, and you must maintain detailed documentation including contractor invoices, permits, and receipts.

For example, a $400,000 cash-out refinance with $100,000 for home improvements (25% of total) and $2,000 in points allows immediately deducting $500 (25% of points), while the remaining $1,500 amortizes over the loan term.

IRS Requirements for Point Deductibility:

The IRS requires meeting these conditions:

• Your home must serve as collateral for the refinance loan
• Paying points must be customary practice in your local area
• Points charged cannot exceed typical amounts for your market
• You must use the cash method of accounting for reporting income and deductions
• Points cannot be charged to waive other loan fees or costs
• The mortgage debt cannot exceed $750,000 ($375,000 married filing separately) for loans after December 15, 2017—proportional limitations apply to loans exceeding these amounts

PMI Tax Deductibility Reinstated:

Good news for 2026: Private Mortgage Insurance (PMI) premiums are once again tax deductible following passage of the One Big Beautiful Bill Act in 2025, which permanently reinstated the deduction after it expired in 2021. Homeowners with adjusted gross income below $100,000 can deduct PMI premiums as mortgage interest, subject to the same itemization requirements as points. This makes refinancing more attractive for borrowers who cannot make 20% down payments and need ongoing PMI coverage.

No-Closing-Cost Refinances:

If you choose a no-closing cost refinance you won’t pay points upfront, eliminating any point deduction. However, these loans typically carry interest rates 0.25-0.50% higher than standard refinances, with the lender covering closing costs through the higher rate. While you lose the point deduction, you also avoid the upfront cash outlay, making this option attractive for borrowers planning to move or refinance again within 3-5 years.

Tax Planning Recommendations:

Before refinancing, consult a qualified tax advisor to:

• Determine if you’ll itemize deductions or use the standard deduction in 2026
• Calculate the actual tax benefit from point deductions based on your tax bracket
• Evaluate whether immediate point deductions (through cash-out for improvements) or amortized deductions better fit your tax situation
• Understand how the $750,000 mortgage debt limit affects your deductibility if you have a large loan
• Compare total costs of paying points versus no-point refinances considering both tax implications and long-term interest costs

The tax implications of refinancing have become more complex since 2017, and many homeowners who previously benefited from point deductions may no longer receive tax advantages. Careful analysis with a tax professional ensures you understand the true after-tax cost of refinancing before committing to a new loan.

Key Updates for 2026:

✅ PMI now permanently deductible (reinstated 2025)

✅ Must itemize ($31,500/$15,750 thresholds)

✅ Cash-out for improvements: immediate deduction

✅ $750,000 mortgage limit applies to points

✅ 90% use standard deduction (no benefit)

✅ Unamortized points deductible on sale/refi

5 Key Points of Deducting Mortgage Refinance Costs in 2026

Refinancing a mortgage can be an excellent financial strategy for homeowners looking to reduce interest rates, access home equity, or adjust loan terms. However, understanding the tax implications of refinancing, particularly regarding which costs are deductible, is crucial for maximizing your tax benefits. The tax landscape changed significantly following the 2017 Tax Cuts and Jobs Act and the 2025 One Big Beautiful Bill Act, creating new opportunities and limitations for refinance-related deductions. Here are five key points to consider when deducting mortgage refinance costs in 2026.

1. Deductible Mortgage Interest (Subject to Debt Limits)

One of the most significant tax deductions available during a mortgage refinance is mortgage interest, though important limitations now apply. When you refinance, interest paid on the new loan is deductible, just like interest on an original mortgage, but only if you itemize deductions rather than taking the standard deduction ($31,500 married filing jointly, $15,750 single filers in 2026).

Critical 2026 Limitation: The mortgage interest deduction is capped at interest on $750,000 in mortgage debt ($375,000 married filing separately) for loans originated after December 15, 2017. Loans originated before this date maintain the higher $1 million limit. If your refinance exceeds these thresholds, only the proportional amount of interest is deductible.

Example: A refinance of $900,000 allows deducting only 83.3% of the interest paid ($750,000 ÷ $900,000), with the remaining 16.7% being non-deductible.

Prepaid interest (per diem interest) charged from your closing date to the end of the month is fully deductible in the year paid, not requiring amortization. This differs from points, providing immediate tax benefits.

Key Point: The interest deduction applies to refinanced loans used to buy, build, or substantially improve your primary residence or second home. Interest on cash-out refinances used for debt consolidation, personal expenses, or education is not deductible under current law. You must itemize to receive any benefit, and the $750,000 debt limit significantly impacts homeowners in high-cost areas.

2. Deducting Points Paid for a Lower Interest Rate (Amortization Required)

When refinancing, homeowners sometimes pay points (also called discount points or loan origination fees) to lower the interest rate. Unlike points paid on a home purchase (which are fully deductible in the year paid), refinance points must be amortized over the life of the loan—whether 15 or 30 years.

How Amortization Works: If you paid $3,000 in points on a 30-year refinance, you can deduct only $100 annually ($8.33 monthly) over 360 months. This provides minimal immediate tax benefit compared to purchase loans.

Important Exception – Cash-Out Refinance for Home Improvements: If you use cash-out refinance proceeds for substantial home improvements (additions, renovations, major repairs), the portion of points attributable to those improvements becomes fully deductible in the year paid. The improvement must add value to your home, and you need detailed documentation (contractor invoices, permits, receipts).

Example: A $400,000 cash-out refinance with $100,000 for home improvements (25% of total) and $2,000 in points allows immediately deducting $500 (25% of points), while the remaining $1,500 amortizes over 30 years.

Early Payoff Benefit: If you refinance again or sell your home before the loan term ends, all remaining unamortized points become fully deductible in that year, accelerating your tax benefit.

Key Point: Refinance points face mandatory amortization over the loan term, creating minimal annual deductions. Only cash-out refinances used for home improvements allow immediate point deductions for the improvement portion. Points also count toward the $750,000 mortgage debt limit, requiring proportional calculations if your loan exceeds this threshold.

3. Property Taxes (Subject to SALT Cap)

Property taxes paid at closing during a refinance are deductible, but significant limitations now apply. Under the 2017 Tax Cuts and Jobs Act (modified by the 2025 One Big Beautiful Bill Act), the state and local tax (SALT) deduction—which includes property taxes—is capped at specific amounts.

2026 SALT Limits:

• $40,000 cap for most taxpayers (2025-2029 under OBBBA)
• $10,000 cap for high earners (phased out for MAGI above $500,000/$250,000 married filing separately)
• These limits include property taxes, state income taxes, and local taxes combined

Property taxes paid during refinancing are prorated based on when they were paid in advance and when the refinance occurred. Your lender typically collects several months of property tax reserves at closing, which go into your escrow account. Only taxes actually paid to taxing authorities (not reserves collected) are deductible.

Example: If your annual property tax is $12,000 and you paid 6 months at closing ($6,000), plus you live in a state with $8,000 in state income taxes, you’ve reached the $14,000 combined SALT amount. However, you can only deduct up to the applicable cap ($40,000 standard, $10,000 if phased out).

Key Point: Property taxes are deductible in the year paid as part of the SALT deduction, but the $40,000 cap (or $10,000 for high earners) combines property taxes with all state and local taxes. Homeowners in high-tax states like California, New York, New Jersey, and Connecticut often exceed these caps, receiving no additional benefit from refinance-related property tax payments. You must itemize to claim any deduction.

4. Mortgage Insurance Premiums (PMI) – Now Permanently Deductible

Major 2026 Update: Private Mortgage Insurance (PMI) premiums are permanently tax deductible starting with tax year 2026 (filed in spring 2027) following passage of the One Big Beautiful Bill Act in 2025. This reinstates the deduction that expired after 2021 and makes it a permanent part of the tax code.

PMI is required for conventional loans with less than 20% equity, while FHA loans require Mortgage Insurance Premiums (MIP), and USDA loans charge guarantee fees. All are now deductible under the reinstated provision.

Income Limitations Apply:

• Full deduction: Adjusted gross income (AGI) below $100,000 ($50,000 married filing separately)
• Phase-out: 10% reduction per $1,000 above threshold
• Complete phase-out: AGI of $110,000+ ($54,500+ married filing separately)

How It Works: PMI premiums are treated as mortgage interest, counting toward the qualified residence interest deduction subject to the $750,000 mortgage debt limit. Monthly PMI premiums paid throughout the year are fully deductible in the year paid (subject to income limits), while upfront PMI premiums must be amortized over 84 months or the loan term, whichever is shorter.

Example: If you pay $150 monthly in PMI ($1,800 annually) with an AGI of $90,000, you can deduct the full $1,800 on Schedule A. However, if your AGI is $105,000 ($5,000 over the threshold), your deduction reduces by 50% to $900.

Key Point: PMI deductibility provides significant tax savings for borrowers with less than 20% equity, particularly first-time homebuyers and those using low down payment programs. However, you must itemize deductions, meet income limits, and stay within the $750,000 mortgage debt cap. This permanent reinstatement eliminates the uncertainty of annual congressional renewal that existed from 2007-2021.

5. Non-Deductible Closing Costs (But May Increase Cost Basis)

Not all refinancing costs are tax-deductible for primary residences. Commonly, charges like title insurance, appraisal fees, recording fees, credit report fees, attorney fees, and document preparation charges are not deductible under IRS rules for primary residence refinances. These costs must be capitalized (added to your home’s cost basis) rather than deducted.

Important Exception – Rental Properties: If refinancing a rental or investment property, these same costs are immediately deductible as rental operating expenses on Schedule E in the year paid. This creates dramatically different tax treatment:

Primary Residence Example:

• Title insurance: $1,200
• Appraisal: $500
• Recording fees: $150
• Total: $1,850
• Current tax benefit: $0 (increases cost basis only)

Rental Property Example:

• Same costs: $1,850
• Immediate deduction: $1,850
• Tax savings: $444-685 (24-37% tax brackets)

Cost Basis Benefit: While these costs provide no immediate tax benefit for primary residences, they increase your home’s cost basis, potentially reducing capital gains tax when you sell. For example, if you paid $300,000 for your home, added $50,000 in refinance closing costs (capitalized over multiple refinances), and sold for $500,000, your taxable gain would be $150,000 instead of $200,000—potentially saving $7,500-11,100 in capital gains tax (15-22.2% rates including 3.8% net investment income tax).