Will the Interest from a Refinanced Mortgage be Deductible? If you are planning on refinancing your home, you might be concerned about whether the interest on the loan is deductible. Here's an overview of the current home mortgage interest deduction rules that should help answer your questions. Interest on your new loan will be 100% deductible if interest on your old loan was fully deductible and you're refinancing the old loan dollar-for-dollar. If your new loan amount is more than the balance on the old one but you use the new money to substantially improve your home, you can generally deduct all the interest on the refinanced loan, provided the new loan amount totals $1.1 million or less. If your new loan amount is more than the balance of the old one but you don't use the new money to substantially improve your home, your interest will generally still be 100% deductible if new money isn't over $100,000. Points on the refinanced loan: Points paid in connection with buying or substantially improving a principal home are currently deductible. However, if you pay points on a refinance loan, they are currently deductible only if: They are paid out of your own cash at the closing of the loan (in other words, the points aren't withheld from your loan proceeds), and The new loan proceeds are used to substantially improve your home. So if you refinance your existing mortgage and use none of the proceeds to substantially improve your home, the points aren't deductible in full in one year. Instead you must deduct the points ratably over the life of your new loan. Prepayment penalty: If you must pay a penalty for paying off your old mortgage early, you'll get a tax benefit. The prepayment penalty is fully deductible in the year it's paid. Because many complications cloud the tax rules for deducting home mortgage interest—for example, you may have several mortgages on your home, or own two homes you use personally—we suggest that you call this office to discuss the details of your situation before making final decisions about refinancing. The extra planning could save you a substantial amount on your taxes.