As tax season nears, it’s important to know how your mortgage, especially if you’ve refinanced is going to affect your taxes. When you refinance your mortgage, your finances are verified and calculated like they were for the original loan, although in some cases your income doesn’t need to be verified. In some cases, your total loan amount may change, but what some don’t think about is whether this has an effect on your property taxes.

To get a better idea on how this whole process works, it’s important to know the three ways in which the value of your home is determined: appraisal, purchase price, and assessment. It is unlikely that all three of these numbers will match, but they should be relatively close to each other.

Property Taxes and You

When it comes to calculating your property taxes, there are two numbers that are used{ your assessment and tax rate. If your home is assessed at $100,000 and your tax rate is 3 percent, you’ll pay $3,000 per year in property tax. Your property tax will increase if your rate or assessment increases, and refinancing doesn’t impact either of these numbers.

The only way to connect refinancing and property taxes is as a type of prediction. This prediction isn’t always accurate since assessment values change at a much slower rate than market prices shift.

Refinancing and Tax Deductions

The IRS allows you to deduct the interest paid on a mortgage on your primary or secondary home up to $1 million. This doesn’t change after refinancing and can be applied to one or both mortgages.

When it comes to cash out refinancing, to be tax-deductible, mortgage debt must have been used to improve or buy your home. So if you do a cash-out refinance and use the funds for something other than home improvement, then they’re no longer considered mortgage debt.

One thing to keep in mind when it comes to refinancing, is that it can reduce your total tax deductions by a significant amount. If you refinance to a lower mortgage rate, you’ll end up paying less interest. This in turn means you’ll have less mortgage interest to deduct when tax time comes around. The same thing applies if you choose to refinance to a loan with a shorter term as your interest cost will fall more quickly over the years.

You will likely save money overall as your interest cost will be reduced but you don’t want to end up in a situation when tax time comes around and not being able to take as much of a deduction as you had planned.

Give Us a Call!

If you have questions regarding your taxes, it’s always best to reach out to your tax advisor. We can always assist you with any mortgage questions you have whether you are a homeowner or jus thinking about buying a home.