The old loan was deductible.
The new loan is bigger.
The extra went to the kitchen, or the credit cards, or both.
The IRS would like to know which.
Welcome. We’re glad to serve you.
Home mortgage interest is deductible if you itemize, up to the interest on $750,000 of debt used to buy, build or improve your home. That limit was temporary and is now permanent. Loans from before December 16, 2017 keep the old $1,000,000 limit, and a refinance can keep it too, within rules. The question every refinance raises is the same: how much of the new loan is still “buy, build or improve” money, and how much is something else. The IRS answers it by tracing where the dollars went, and so must you.
Two other things are on this page because they come with the refinance. Points are treated differently on a purchase and on a refinance. And mortgage insurance premiums, which had stopped being deductible, are deductible again starting with 2026 returns, permanently, for people under an income limit. And one thing comes first, because it decides whether any of this matters: with a $32,200 standard deduction and a $40,400 cap on state and local taxes, many Colorado homeowners no longer itemize at all.
Mortgage interest only helps if your itemized deductions exceed the standard deduction: $16,100 single, $32,200 married for 2026, plus the senior additions. Itemized deductions for most households are mortgage interest, state and local taxes (capped at $40,400 for most filers in 2026), charitable gifts, and medical expenses above 7.5% of income. A couple with $11,000 of mortgage interest, $9,000 of property and income taxes and $3,000 of charity has $23,000, and takes the standard deduction; the mortgage interest deducts nothing. A couple with a $600,000 loan at 6.5% has $39,000 of interest alone and itemizes comfortably.
The rest of this page is for the second couple, and for the first couple in a year they bunch charitable gifts or have large medical bills. Our page on itemized vs. standard deductions covers the comparison.
↑ Back to topDeductible mortgage interest is interest on acquisition debt: a loan secured by your main home or one second home and used to buy, build or substantially improve it. The limit on acquisition debt is:
| Loan originated | Limit (married, and single) | Married filing separately |
|---|---|---|
| On or before December 15, 2017 (or under a contract by then, closed by April 1, 2018) | $1,000,000 | $500,000 |
| After December 15, 2017 | $750,000 | $375,000 |
The 2025 act made the $750,000 limit permanent; it had been scheduled to revert to $1,000,000 in 2026. If your total acquisition debt is over the limit, the interest is deductible in proportion: a $900,000 post-2017 loan deducts 750/900ths of its interest. The limit applies to the combined debt on both homes.
↑ Back to topA refinance keeps acquisition-debt status for the amount equal to the remaining balance of the loan it replaced. Refinance a $480,000 balance with a new $480,000 loan and nothing changes; the new loan is acquisition debt. Refinance the same balance with a $560,000 loan and $480,000 is acquisition debt and $80,000 is something else, decided by what you did with the $80,000.
The grandfathering travels the same way. A 2016 loan with a $700,000 balance refinanced in 2026 into a new $700,000 loan keeps the $1,000,000 limit on that $700,000. If the new loan is $800,000, the extra $100,000 is new debt under the $750,000 rules, and since $700,000 of grandfathered debt plus $100,000 of new debt exceeds the new limit, part of the new interest is lost. There is also a term limit: grandfathered status lasts only as long as the original loan’s term would have, so a 30-year loan from 2016 can’t be grandfathered past 2046 by refinancing into a new 30-year loan in 2026.
↑ Back to topThe cash you take out, and any home equity loan or HELOC, is deductible only if the money was used to buy, build or substantially improve the home that secures it. A new roof, a kitchen, a finished basement, an addition: deductible, and it counts toward the $750,000. Paying off credit cards, buying a car, funding college, investing, or improving a different property: not deductible as mortgage interest, no matter that the loan is secured by your house. The 2017 act ended the separate $100,000 home-equity allowance and the 2025 act made that permanent.
“Substantially improve” means adding value, prolonging life, or adapting to new use. Repairs and maintenance (painting, a new water heater, fixing the deck) do not qualify. Keep the invoices with the loan documents; a cash-out refinance with $60,000 spent on a remodel is deductible interest for thirty years, and the proof is a contractor’s invoice from one year.
If the cash went to several things, the loan is split proportionally and the improvement share is deductible. Repaying the non-qualified part first, where the loan allows, moves the whole loan back toward qualified.
So the bank will lend me money against my house for anything I want, and the IRS will let me deduct the interest only if I spend it on the house. The bank and the IRS have never met, and I am the one introducing them, every April.
↑ Back to topPoints are interest paid up front to lower the rate. On a loan to buy or build your main home, they are deductible in full in the year paid, provided they’re a normal charge in your area, computed as a percentage of the loan, shown on the closing statement, and paid from funds you brought to closing (seller-paid points are deductible by the buyer, too, with a basis reduction).
On a refinance, points are spread over the life of the loan: $6,000 of points on a 30-year loan is $200 a year. The exception is the portion of a refinance used for improvements, which can be deducted in the year paid. When you pay off or refinance the loan again, the remaining undeducted points are deductible in that year, unless you refinance with the same lender, in which case the leftover is added to the new loan’s points and spread again. People lose this one constantly: the $4,200 of unamortized points from the 2021 refinance is deductible in 2026 when the loan is paid off, and nobody tells the software.
↑ Back to topIf you bought with less than 20% down, you pay private mortgage insurance, or FHA mortgage insurance, or a VA funding fee or USDA guarantee fee. For years those premiums were deductible as mortgage interest; the deduction expired after 2021. The 2025 act restored it permanently starting with 2026. The premium goes on Schedule A with the interest, from box 5 of your Form 1098.
The old income limit came back with it: the deduction phases out starting at $100,000 of adjusted gross income (any filing status except married filing separately, which starts at $50,000), reduced by 10% for every $1,000 over, and gone at $110,000. Many of the households paying PMI are under the limit, which was the point. Single premiums paid up front at closing are spread over the shorter of 84 months or the loan term; FHA and VA up-front fees have their own allocation rules.
↑ Back to topOriginal loan, 2016: $640,000. Balance in March 2026: $520,000. New loan: $640,000 at 6.1%, with $7,680 of points. They use $80,000 of the $120,000 cash-out for a primary suite addition and $40,000 to pay off two cars and a credit card. Interest paid for the rest of 2026: $29,000. Married filing jointly, AGI $240,000, property taxes $6,200, Colorado income tax $9,800, charity $4,000.
Acquisition debt: $520,000 (the refinanced balance, grandfathered at the $1,000,000 limit) plus $80,000 (the addition, new debt under the $750,000 limit) = $600,000. The $40,000 for cars and cards is not acquisition debt. Deductible share: 600/640 of the interest = $27,190 of the $29,000.
Points: the $80,000 improvement share is 12.5% of the loan, so $960 of points is deductible in 2026; the remaining $6,720 is spread over 30 years, $224 a year, with any leftover deductible when the loan is paid off.
PMI: none; they have more than 20% equity.
Itemizing: $27,190 + $960 + $16,000 of taxes (capped at $40,400, so all of it) + $4,000 = $48,150, against a $32,200 standard deduction. They itemize, and itemizing saves them about $3,800 of federal tax over the standard deduction. The 1098 reports the full $29,000 and all $7,680 of points as if deductible this year; a return that took them at face value would overstate the deduction by about $8,500, which the IRS can see from the closing disclosure.
Colorado starts from federal taxable income, so whatever mortgage interest reduced your federal taxable income reduces Colorado’s at 4.40%, and if you took the standard deduction federally you take it in Colorado too; there is no separate Colorado itemization. One Colorado wrinkle for high earners: taxpayers with federal adjusted gross income above $300,000 (single) or $400,000 (joint) must add back itemized deductions above $12,000 (single) or $16,000 (joint) on the Colorado return, which claws back part of a large mortgage interest deduction at the state level (verify the current Colorado itemized-deduction addback thresholds and whether they continue for 2026). Below those incomes, the federal result carries straight through.
↑ Back to topThe interest on the refinanced balance of your old loan is. The interest on the $50,000 is not, because the money didn’t buy, build or improve the home. The 1098 reports all of it as mortgage interest; the split is yours to make on the return.
No. Loans from before December 16, 2017 keep the $1,000,000 limit, and a refinance of the remaining balance keeps it too. Any amount you add in a refinance is subject to the $750,000 rules.
Only the share used for home improvements. The rest is spread over the life of the loan, about $167 a year on a 30-year loan. When you pay the loan off or refinance with a different lender, whatever is left is deductible that year.
Yes, starting with your 2026 return, permanently. The premium is on box 5 of your 1098 and is deducted with your mortgage interest if you itemize, phasing out between $100,000 and $110,000 of adjusted gross income.
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Bring the closing disclosure from the refinance and tell us where the cash went. The 1098 reports every dollar of interest as if it were deductible, and the software believes it; the split between the house and the credit cards is made by us, once, and then carried for the life of the loan. If you are planning a refinance with cash out, call first: putting the improvement money in the loan and paying for the cars some other way, or paying the non-qualified part down first, is the difference between deducting all of the interest and most of it, every year until 2056.
Call 303-734-1040 or stop by the office in Lone Tree. We’ve been reading the footnotes for Douglas County and the Denver area since 1969.
Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Last updated October 15, 2026.
