Yes, a mortgage refinance qualifies for tax credit; in fact it is one of the couple of other tax breaks that you can get if you are refinancing an existing mortgage. The tax breaks revolve around you paying “points” with the closing costs of your first mortgage. A point equals one percent of the total loan amount and is also termed loan discount or origination fee.

A first mortgage on your primary residence will let you enjoy deductions on the points in the very year that they are paid. However, when you refinance a mortgage loan you are allowed to avail deductions of the life of the term of the new mortgage. Then again, if you feel that the rates have fallen down and you wish to refinance again you may be eligible to get a full deduction on the unamortized amount carried over from the earlier refinance.

The IRS sets certain conditions for the deduction of unamortized points. So, if you choose to go for a refinance with the same lender then you cannot get a deduction in the same year, it has to be over the term of the refinance loan. Refinancing with the same lender is not a very common happening, it occurs only 20% of the time.

A very obvious benefit of a refinance is the lower interest rate. If you use your refinance amount to pay off the earlier mortgage and also for home improvement then the percentage of the mortgage value used for home improvement acts as a base for calculating the percentage of points that attract a tax credit.

An important thing to remember is that you will enjoy tax breaks only on your primary residence and not vacation homes. If it is a second home then you have no option but to have the points amortized over the term of the loan.

If you pay off your mortgage early you will be able to deduct any unamortized points in the year you pay off the mortgage. However, if there is a penalty for early repayment then that fee is deducted. Similarly, late payment fees are also deductible.

Here are some good points on tax deduction and refinance.