One of the most significant tax deductions homeowners can receive is mortgage interest. So, if you’re about to refinance your mortgage, you might be wondering what that means for your taxes.
While the tax implications of refinancing are similar to those of your original mortgage, refinancing comes with some special considerations, especially if you’re taking cash out.
Keep reading to see how refinancing your mortgage impacts your taxes.
Highlights
- Mortgage interest is still deductible after refinancing, as long as the loan amount stays within IRS limits and you itemize your deductions.
- Cash from a cash-out refinance is not taxable, but how you use the cash will impact how much of your mortgage interest you can deduct.
- Mortgage points on a refinance are deductible, while most closing costs are not.
What Parts of a Mortgage Are Deductible?
Refinance tax deductions are similar to standard mortgage deductions.
In summary, the following are tax-deductible:
- Mortgage interest
- Discount points
- Home equity used for home improvements
- Property taxes (up to $10,000)
And the following are not tax-deductible:
- Most closing costs
- Homeowners insurance
- Principal (the amount by which you reduce the sum you borrowed)
- Home equity used for debt consolidation or other non-home improvement needs
Tax Deductions and Refinancing
The IRS allows you to deduct the interest paid on up to $750,000 in mortgage debt, on either your primary or secondary home, or the two combined.
So if you have a $500,000 mortgage on your primary home and $250,000 mortgage on a vacation home, you can deduct all your mortgage interest.
You can still deduct interest if your mortgage debt exceeds $750,000, but you can only deduct the interest paid on $750,000 of it — not the full amount. Here’s an example with a $825,000 mortgage:
| $825,000 Mortgage | $750,000 Mortgage | |
| Interest Paid | $51,288.60 | $46,626.08 |
| Deductible Interest | $46,626.08 | $46,626.08 |
Assumes a 30-year, fixed-rate loan at 6.25% interest. All figures are for example purposes only. Not a commitment to lend.
This doesn’t change after refinancing, so you can refinance one or both mortgages and still deduct all your mortgage interest, as long as the combined mortgage principal does not exceed $750,000.
Itemizing Your Deductions
Whether or not you can deduct your mortgage interest on a refinance depends on how you file your taxes. Anyone who uses the standard deduction cannot claim a deduction for mortgage interest.
However, if you itemize your deductions, you can claim this deduction up to a certain amount.
Your decision to use the standard deduction or itemize will depend on which can offer you the most significant benefit. In other words, if the interest you paid on your mortgage plus any other deductible expenses (e.g., donations) exceed your standard deduction amount, it may be in your best interest to itemize.
For 2024 taxes (those filed in 2025), the standard deduction amounts are as follows:
- Single or Married Filing Separately: $14,600
- Married Filing Jointly: $29,200
- Head of Household: $21,900
Part of the Tax Cuts and Jobs Act of 2017 included a significant increase in the standard deduction amount. The goal was to reduce the number of taxpayers itemizing, making tax filing easier.
Tax Rules for Cash-Out Refinancing
Is the Cash from a Cash-Out Refinance Taxable?
No — the cash you receive from a cash-out refinance is not considered income, so you don’t pay taxes on it. You’re simply borrowing against the equity in your home, which means it’s a loan and not taxable in the eyes of the IRS.
Can You Deduct the Interest on a Cash-Out Refinance?
Yes, like any mortgage, the interest you pay on a cash-out refinance mortgage can be deductible. However, how much of that interest is tax-deductible depends entirely on what you do with the cash.
When you take out a cash-out refinance, your new mortgage includes:
- The remaining balance of your original loan
- Plus, the extra cash you pulled out
If you use that extra cash for home improvements—like remodeling a kitchen or building a deck—the entire mortgage balance may still qualify for the interest deduction (as long as it is below the IRS limit).
But if you use the cash for anything other than improving your home, like paying off credit cards or funding a vacation, that portion of the loan becomes home equity debt, and the interest may not be deductible at all.
Example
Let’s say Jenny owes $200,000 on her mortgage. She refinances for $275,000 and takes $75,000 in cash.
- If she uses that $75,000 to build an addition, the full $275,000 is considered qualified mortgage debt — and all the interest is deductible.
- If she uses the $75,000 to pay for her children’s college, only the interest on the original $200,000 would be deductible. The $75,000 used for non-home purposes would not qualify, and the interest on that portion would be non-deductible.
Here’s How That May Look:
| Cash Used for Home Improvements | Cash Used for College | |
| Loan Balance | $275,000 | $275,000 |
| Portion of Loan That’s Deductible | $275,000 | $200,000 |
| Interest Paid | $46,626 | $46,626 |
| Deductible Interest | $17,096 | $12,434 |
Assumes a 30-year, fixed-rate loan at 6.25% interest. All figures are for example purposes only. Not a commitment to lend.
Note that, in this example, using the cash to pay for college brought her deductible interest amount below the standard deduction. So, unless Jenny has other deductions that’ll help her exceed $14,600, it may be in her best interest to take the standard deduction.
Always discuss your options with your tax professional.
See our full guide to the tax implications of a cash-out refinance to learn more.
Refinancing to Pay Off Debts
One popular reason for refinancing is to consolidate higher-interest debt, like credit cards or personal loans. While this can lower your monthly payments and simplify your finances, it comes with a tax trade-off.
Under current IRS rules:
- You can only deduct mortgage interest if the debt was used to buy, build, or improve your home.
- If you use a cash-out refinance to pay off credit cards, student loans, or other personal debts, the interest on that portion of your loan is not deductible — even though it’s now part of your mortgage.
Example: If you refinance for $300,000 and $50,000 of that was used to pay off credit cards, you can only deduct the interest on the $250,000 used to buy or improve the home.
While you may still benefit from a lower interest rate, you’ll lose the tax deduction on that portion of the debt.
How we source rates and rate trends
Rates based on market averages as of Dec 02, 2025.Product Rate APR 15-year Fixed Refinance 5.37% 5.42% 30-year Fixed Refinance 6.35% 6.37%
Mortgage Points Are Tax-Deductible, but Most Closing Costs Aren’t
In the same year that you refinance, you can begin to deduct the discount points you used to get a reduced mortgage rate. Unlike points on your first mortgage, these points must be deducted over the life of the loan. So, if you have a 15-year mortgage, you need to deduct 1/15 of the points per year.
If you have refinanced more than once, you can deduct unclaimed discount points from an earlier refinance if you haven’t already taken advantage of them.
For example, say you refinanced in early 2021 to take advantage of ultra-low rates, paid points, and began deducting 1/15 of these points in the following years. If you refinanced again in 2025 to take out cash or you sold your house, you could take advantage of the unused portions of the 2021 points at that time.
How to Claim a Tax Deduction on a Mortgage Refinance
Your mortgage lender will send a Form 1098 each year at the end of January or the beginning of February. This form states how much interest you paid on your mortgage the previous year.
You will then take this number and report it on your Form 1040 Schedule A.
If you purchased mortgage points on a refinance, Form 1098 will also list that amount. This will also be added to Form 1040 Schedule A.
However, because this deduction is spread out over the remaining life of your loan, you’ll need to calculate this amount.
Suppose you paid $3,000 for mortgage points and have 20 years remaining on your loan. You can claim a deduction of $150 each year until your loan is paid off.
The Bottom Line
Many people refinance their mortgages to lower their monthly payments or speed up repayment. However, it’s essential to understand that when you refinance your mortgage, slightly different rules surrounding the mortgage interest deduction will apply.
Thinking about refinancing to lower your payments, access cash, or pay off high-interest debt? Explore your options and apply with Refi.com today.
