Refinancing continues to be an attractive option for many homeowners. There are some key tax consequences to consider related to refinancing.

You can generally deduct all interest on your new mortgage if you use the proceeds to retire your old mortgage or to substantially improve your home, as long as the loan balance does not exceed $1 million. You may also be able to borrow an additional $100,000, and use it for any purpose (except to buy tax-exempt bonds), and deduct the interest.

In general, points paid for refinancing cannot be deducted currently; the deduction must be spread over the life of the loan. You can deduct any remaining points in the year you refinance again. If your old lender charges a prepayment penalty, you can also generally deduct that as mortgage interest.