Deductible Mortgage Interest When Refinancing

The U.S. tax code allows homeowners to deduct interest on their tax return (Schedule A) up to $1,000,000 in mortgage(s) for their principle residence and second residence plus the interest on up to $100,000 in home equity loan. This interest deduction only applies when the home(s) is/are purchased, better known as acquisition interest.

If you were to refinance either of your residences then the mortgage interest you can deduct is based on your mortgage loan balance at the time you refinanced. For example:

• Purchase price $200,000
• Loan balance reduced to $150,000
• Refinanced for $450,000 at lower interest rate

Your mortgage interest deduction is limited to the interest on $150,000.