With interest rates hovering around historical lows, many people are tempted to refinance their mortgage. While refinancing can be a great proactive approach to dealing with mortgage debt, there are some tax considerations.
Mortgage Interest Deduction
Currently, owning a home allows you to reduce your taxable income by the amount you paid in interest towards your mortgage for that year. Deducting the cost of your mortgage interest from your taxable income can save you hundreds of dollars in tax liabilities each year. Sounds good, right? It is, but getting the most from this tax deduction is directly dependent on a higher interest rate.
When you refinance your mortgage you are lowering your mortgage interest rate. While this is also a good thing, you must remember that it will impact the amount of benefit you receive at tax time. Obviously, lowering your monthly payment on a mortgage is a great tool for saving money and lowering your risk of default, in the event of financial hardship; but it should be considered that you will not be able to depend on a lower tax bill come next tax year. That being said, it is a good rule of thumb to never depend on a tax return for your financial well-being.