When you pay discount points at closing to buy down your mortgage rate, the IRS typically requires you to deduct those points over the life of the loan, not all at once. If you refinance before the end of that original loan term, you're left with an unamortized point balance—the portion you haven't yet deducted. What happens to it depends on the type of refinance and whether you're staying with the same lender.
How points are normally deducted
For a primary residence purchase, discount points are generally amortized evenly over the loan term. If you paid three thousand dollars in points on a thirty-year fixed mortgage, you'd deduct one hundred dollars per year for thirty years. These figures are illustrative; rates and products are subject to change and this is not a commitment to lend. After five years, you've deducted five hundred dollars, leaving twenty-five hundred unamortized.
Refinancing with a different lender
When you refinance with a new lender and pay off the original loan, the IRS generally allows you to deduct the entire remaining unamortized point balance in the year you refinance. The original loan is satisfied, so the points tied to that loan are fully deductible at payoff. This accelerates the deduction you would have taken over the remaining loan life.
Refinancing with the same lender
If you refinance with the same lender, the IRS may require you to continue amortizing the old points over the new loan term, rather than deducting the balance immediately. This extends the deduction period rather than accelerating it. The distinction hinges on whether the IRS views the transaction as a true payoff or a modification of the existing debt.
Cash-out vs rate-and-term scenarios
A rate-and-term refinance—where you're simply changing the rate or term without taking cash out—typically allows the unamortized balance to be deducted in full if you're moving to a different lender. A cash-out refinance may be treated differently depending on how the IRS characterizes the transaction. The rules become more complex when you're blending old debt with new borrowing, and the allocation of points between the portions can affect timing.
New points paid on the refinance
Any new discount points you pay on the refinance loan are subject to their own amortization schedule over the new loan term. They do not combine with or accelerate the old points. You'll track two separate deduction streams: the carryover from the old loan and the amortization of the new points.
The Alliance take
Understanding point amortization and the payoff rules helps you model the true after-tax cost of refinancing early. If you're weighing a refinance and have unamortized points, factor the potential acceleration into your break-even math. Consult a CPA or attorney; this is not tax or legal advice. When you're ready to explore a refinance scenario, start an application and we'll walk you through the loan-level mechanics so you have the numbers your tax professional needs.