Lower mortgage affects tax deductions
A lower mortgage interest rate means you pay less total interest per year, and thus, there is less interest available to deduct from your income for tax purposes. Your income tax liability is likely to increase, and this must be an offset against the savings in mortgage interest. The total impact of a reduced mortgage interest rate depends on factors such as your income, tax bracket, and other deductions. (See Refinancing Your Mortgage Work Sheet) Some refinancing costs may be tax deductible in the year you refinance. However, discount points usually must be spread out over the life of the mortgage to be deducted, even if paid up-front. Check with your local IRS office.
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