Refinancing Your Home? How It Affects Your Mortgage Interest Deduction

14 January 2026

Thinking about refinancing your home? You're not alone. Whether you're chasing a lower interest rate, switching loan types, or tapping into your home’s equity, refinancing can feel like hitting the financial refresh button. But here’s the kicker—refinancing isn’t just about monthly payments or interest rates. It can also shake things up when it comes to your mortgage interest tax deduction.

So, before you sign those new loan papers, let’s break down how refinancing impacts your ability to write off mortgage interest and what you need to watch out for come tax season.

What Is the Mortgage Interest Deduction Anyway?

Before we dive into refinancing, let’s clear the air on what the mortgage interest deduction even is.

In simple terms, it’s a tax break. If you itemize deductions on your tax return, you can deduct the interest you pay on your mortgage, up to a certain limit. This can save you hundreds, if not thousands, of dollars every year depending on your loan amount and tax bracket.

But—and this is important—not everyone qualifies, and the IRS has rules, especially after the Tax Cuts and Jobs Act (TCJA) of 2017 shook things up.

The Tax Cuts and Jobs Act Changed the Rules

As of 2018, the IRS put tighter restrictions on the mortgage interest deduction:

- You can deduct interest on mortgages up to $750,000 (or $375,000 if married filing separately), down from the previous $1 million cap.
- The deduction applies only to acquisition debt, which means money borrowed to buy, build, or substantially improve your home.

So, what does that have to do with refinancing? A whole lot, actually.

The Big Question: Does Refinancing Affect Your Mortgage Interest Deduction?

Short answer? Yes—it can. But not always in a bad way.

When you refinance, you're essentially replacing your existing mortgage with a new one. That means the IRS could view your new loan differently, depending on several factors, like:

- How much you refinance for
- What you do with any extra cash you pull out
- When the original loan was issued

Let’s unpack each scenario.

Refinancing Without Cash-Out: The Straightforward Case

If you refinance your home without taking out extra money—just to get a lower interest rate or switch loan terms—you’re in luck. In most cases, you can continue deducting your mortgage interest just like before.

But timing matters.

Was Your Original Mortgage Taken Out Before December 15, 2017?

If so, you're grandfathered into the old $1 million deduction limit. Even if you refinance today, you can deduct interest on loan amounts up to $1 million, as long as:

1. The new loan doesn’t exceed the balance of your old loan, and
2. The refinance is used for the same property.

Nice, right?

Refinanced After December 15, 2017?

If your original mortgage was taken out after this date, the new $750,000 cap applies. This doesn’t mean you can’t deduct your interest—it just means the amount of deductible interest might be smaller if your loan is larger.

The bottom line: stick to the original loan amount (or less), and you're generally good to go.

What Happens If You Take Cash Out?

Let’s say you refinance and take an extra $50,000 out to remodel your kitchen. Can you deduct the interest on that full loan now?

Well—yes and no.

Here’s where the IRS cracks down on your intentions.

If You Use the Cash to Improve Your Home…

Then congratulations—you’re still in the clear. Home improvements count as “qualified acquisition debt,” so interest on the full refinanced loan (including the extra $50k) may qualify for the deduction, as long as the total doesn’t exceed the IRS limits.

New kitchen? Tax win.

If You Use the Cash for Anything Else…

Now it gets tricky. Let’s say you take that $50,000 and pay off credit card debt or buy a car. Guess what?

That portion of your new mortgage isn’t considered acquisition debt. And the IRS says you can’t deduct interest on the part of the loan used for unrelated stuff.

Harsh, but fair.

So always keep receipts and records to show how you used the funds. If you’re ever audited, you’ll thank yourself.

What About Points Paid During Refinancing?

If you’ve been through a mortgage refinance before, you may have paid “points.” These are upfront fees paid to reduce your interest rate—a common tactic.

Now, in the original mortgage world, you could usually deduct those points in the same year you paid them. But refinancing throws a curveball.

In a refinance, you typically have to deduct those points over the life of the loan. So if you paid $3,000 in points on a 30-year refinance, you’d deduct $100 per year.

Patience pays—literally.

Pro Tip: If you refinance again or pay off the loan early, you might be able to deduct the remaining points in that year. You’ll want to consult a tax pro about that one.

Can You Still Itemize Deductions?

Here’s what many people overlook...

After the TCJA, the standard deduction is much higher:

- $13,850 for single filers (2023)
- $27,700 for married couples filing jointly (2023)

So unless your total itemized deductions (including mortgage interest) exceed that amount, you won’t benefit from the mortgage interest deduction at all.

This is where refinancing becomes even more about math than ever before. It’s not just, “Will I save money monthly?” It’s, “Will this restart my mortgage clock in a way that limits my tax savings, too?”

The 1098 Form: Your Best Friend During Tax Season

When tax season hits, your lender will send you Form 1098. This handy little document shows:

- The amount of mortgage interest you paid
- The loan amount
- Any points you paid

This is the form you (and your tax software or accountant) will use to determine what’s deductible.

Always double-check it—especially if you’ve refinanced during the year. Mistakes happen, and you don’t want the IRS sending you love letters in July.

Refinancing Rental Property? The Rules Shift Again

If the property you're refinancing is a rental or investment property, the deduction rules shift from personal to business.

The good news is that mortgage interest on rental properties is usually fully deductible as a business expense, regardless of the loan amount or what you use the funds for.

Bonus: You don’t have to itemize to deduct it—just report it on your Schedule E.

Different ballgame, but one with its own tax-saving perks.

When Should You Talk to a Tax Pro?

Honestly? If you’ve refinanced, especially with cash out, it's a great idea to run your numbers by a CPA or an enrolled agent. The IRS isn’t always black and white with these rules, and a professional can save you from making some expensive tax season mistakes.

Plus, they can help you strategize future refinances or home improvements to maximize your deductions.

Final Thoughts: Is Refinancing Still Worth It?

Totally! Even with the tax implications, refinancing can be a smart move for lowering your interest rate, reducing monthly payments, or converting to a more manageable loan type.

Just don’t assume the tax benefits will match your original mortgage setup. Use this opportunity to do a full financial review—not just a rate check.

And remember: the IRS doesn’t care if your kitchen looks gorgeous—they care about how you financed it.

Quick Recap

- Refinancing can affect your mortgage interest deduction, especially if you take cash out.
- Loans from before December 15, 2017, may still qualify for the $1 million deduction limit.
- Post-2017 loans are generally capped at $750,000 for deduction purposes.
- Only money used to buy, build, or improve a home qualifies as deductible debt.
- Cash-out used for unrelated purposes? No deduction there.
- Points on a refinance are deducted over the life of the loan, not all at once.
- High standard deductions mean fewer people benefit from itemizing.
- Rental property interest remains deductible under business rules.

Final Word

Refinancing isn’t a one-size-fits-all decision—especially when it comes to taxes. But now that you know the ropes, you’re better equipped to make the call that lines up with your wallet and your goals.

And hey—if you can lower your monthly payment and keep some tax perks in the process? That’s a serious financial win.