Is a prepayment penalty tax deductible?

If you have a mortgage with a prepay penalty, the prepayment penalty is tax deductible because it is an interest charge. Different rules apply if it is an investment property.

Take the time to look at your note on your current loan to see when your pre-payment penalty expires. A prepayment fee is tax deductible, but you may be better off in some cases waiting if the pre-payment penalty period is due to expire shortly.

Never choose to refinance your mortgage looking for the tax benefit. A pre-payment penalty is tax deductable, however, if you are refinancing and your pre-payment penalty is $8,000 and you're refinancing to save $100 a month on your payment, you won't reap the benefit of the refinance until 6 1/2 years from the time you refinanced.

The Tax deduction is only one factor in making the decision on whether or not to pay a pre payment penalty to refinance. You should also weigh the non-tax benefits of refinancing with your financing professional, whether it be obtaining lower payments, high interest credit card debt consolidation or separating cash from home equity with a cash out refinance.