Question:

Is mortgage prepayment penalty tax deductible?

Answer:

Yes, home mortgage prepayment penalty is fully tax deductible if you paid it on a refinance, but didn't roll it into the new loan amount. If you fully paid down the mortgage, the prepayment penalty fee can be written off in full, as well.

However, if you made the refinance and you paid less out of pocket closing costs to take the new mortgage compared to what you paid in prepayment penalty charges, you will be allowed to deduct it over the life of the new loan.

Deducting Mortgage Prepayment Penalty Charges

If you paid $4000 prepay penalty fee, you paid less than $4000 in closing costs out of pocket, and your new loan is spread over 20 years, you are allowed to deduct $200 per year.

If you refinance again, any mortgage points you paid, and any prepayment penalty charges can be written off in full.

Recommended helpful present and future homeowners links:
Why: Refinance to a fixed rate loan while mortgage rates are still low.
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Common misspellings: mortage and morgage