How Does Refinancing Affect Your Taxes: Points, PMI, and Cash-Out

Refinancing your mortgage affects your taxes in several specific ways: it can change how much mortgage interest you can deduct, force points paid at closing to be spread over the life of the loan, and — if you take cash out — turn part of your interest into a non-deductible expense. Private mortgage insurance premiums are now permanently deductible starting with the 2026 tax year under the One Big Beautiful Bill Act, and the same law made the $750,000 cap on deductible mortgage debt permanent ($375,000 if married filing separately). None of these effects reach your return unless you itemize.

Itemizing Is the Gate

Mortgage interest, points, PMI, and property taxes are all itemized deductions claimed on Schedule A.¹ If your itemized deductions do not exceed the standard deduction, the refinance changes nothing on your return. For 2026, the standard deduction is $32,200 for married couples filing jointly, $16,100 for single filers and married filing separately, and $24,150 for heads of household.²

Watch for a common flip: a refinance that drops your rate meaningfully also drops your annual interest, and that smaller interest number can pull your itemized total below the standard deduction. Run the comparison the first year after closing, and again if you refinance a second time.

What Happens to Your Mortgage Interest Deduction

On a straight rate-and-term refinance where the new balance does not exceed the remaining principal on the old loan, the IRS treats the new loan as a continuation of the old one for deduction purposes. It stays classified as acquisition indebtedness — debt used to buy, build, or substantially improve a qualified home — and the interest remains deductible.¹³

The cap is $750,000 in combined mortgage debt on a main home and one second home ($375,000 if married filing separately). Stay at or below that combined figure across qualifying properties and all of your interest remains deductible.

If your original mortgage predates December 16, 2017, you may qualify for a higher $1 million cap ($500,000 if married filing separately). That grandfathered status survives a refinance as long as the refinanced balance does not exceed the principal remaining on the original loan just before closing. Any amount above that old balance falls under the current $750,000 rule unless it went to substantial home improvements.

One practical detail for the year you refinance: expect a Form 1098 from both the old lender and the new lender, each covering interest paid during its portion of the year.⁴ Add them together for your deduction.

Points Have to Be Spread Over the Loan Term

Points paid on a purchase mortgage can usually be deducted in full the year you pay them. Points paid on a refinance cannot. They are treated as prepaid interest and must be deducted evenly over the term of the new loan.¹ Pay $3,600 in points on a 30-year refinance and your deduction is $120 a year.

Two situations change that.

First, if part of the refinance funded substantial home improvements, the share of points tied to that improvement money is deductible in the year paid, provided you paid those points with your own funds rather than from the loan proceeds. The remaining points, tied to the refinanced balance, still get amortized.

Second, if you sell the home or pay off the loan before its term ends, you can deduct the unamortized balance of points in that final year. The trap: refinancing again with the same lender kills that acceleration. In that case, the leftover points from the old loan must be combined with any new points and spread over the term of the newest loan. Switching lenders on the second refinance avoids the problem and lets you deduct the leftover points that year.

Closing Costs That Give You Nothing at Tax Time

Most refinance closing costs are neither deductible nor addable to your home’s cost basis:⁵

Appraisal fees
Credit report fees
Title insurance premiums (the lender’s policy)
Loan assumption fees

Keep your closing disclosure for your records, but do not expect these line items to reduce your tax.

Cash-Out Refinancing Changes the Math

When the new loan is larger than the old balance and you keep the difference, the interest on that extra borrowed amount is deductible only if you use the money to buy, build, or substantially improve the home securing the loan.¹ A new roof or a kitchen remodel qualifies. Paying off credit cards, covering tuition, or buying a car does not, even though the loan is secured by your house.

If the cash-out proceeds went to non-qualifying uses, you have to split the interest. On a refinance from $300,000 to $400,000 where the extra $100,000 funded a vacation and debt consolidation, the interest on that $100,000 slice is entirely non-deductible. Keep contractor invoices and receipts to document how the funds were used; the split will need to hold up if the IRS asks.

Cash Out for Investment or a Rental

Using cash-out proceeds for investment purposes moves the interest off Schedule A but does not necessarily kill the deduction. Interest allocated to a rental property gets reported on Schedule E. Interest allocated to other investments can be claimed as investment interest on Schedule A, subject to its own separate limit. The category shifts; the deduction may survive.

PMI Premiums Are Now Permanently Deductible

Beginning with the 2026 tax year, premiums for private mortgage insurance on acquisition debt are permanently treated as deductible mortgage interest under the One Big Beautiful Bill Act. If your refinance requires PMI because you have less than 20 percent equity, those premiums are deductible alongside your regular interest. In prior years the PMI deduction had a history of expiring and being retroactively renewed; that uncertainty is gone, and you can build it into your refinancing math.

Property Taxes, Escrow, and the SALT Cap

Refinancing usually reshuffles your escrow. Your old lender closes out its escrow account and sends you a refund; the new lender opens a fresh one. For deduction purposes, only property taxes that were actually remitted to the taxing authority during the calendar year count.⁵ Money sitting in escrow is not a tax payment yet, and an escrow refund is not a tax payment at all. Pull year-end statements from both lenders to see what each one actually paid the county on your behalf.

The SALT cap then limits what you can deduct. For 2026, the cap is $40,000 for most filers under the One Big Beautiful Bill Act, up from the previous $10,000. It phases out for filers with modified adjusted gross income above $500,000 and drops back to $10,000 at income above $600,000. Combined state income taxes and property taxes above the applicable cap do not deduct, no matter what you paid.

Keeping a Mortgage Credit Certificate Through a Refinance

If you hold a Mortgage Credit Certificate from a state or local housing program, a refinance can end the credit unless the issuing agency reissues the certificate. To preserve the credit, the reissued MCC must:⁶

Go to the same holders for the same home
Fully replace the old certificate, with no portion of the old balance retained separately
Have certified indebtedness no greater than the outstanding balance on the old certificate
Carry a credit rate no higher than the original
Not produce a larger annual credit in any year than the original would have allowed

A lower interest rate after refinancing will typically shrink the annual credit because it is calculated from interest paid. For the transition year, you may need to attach a statement to Form 8396 showing separate calculations for the periods before and after the reissued certificate. Contact the housing agency that issued the original certificate before you close on the refinance; starting the reissuance process after closing can be too late.

1
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Office of the Law Revision Counsel. 26 USC 163 – Interest
4
Internal Revenue Service. Form 1098 Mortgage Interest Statement
5
Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
6
Internal Revenue Service. Form 8396, Mortgage Interest Credit (2025)