@atkinsjam
I can show you the publication and regulations that contain the rules, but I’m not sure I can find anything in writing that explains why the rules exist. Let me explain it as best I can and see if it’s satisfactory to you.
Points are a form of mortgage interest. To take any tax deduction, you must pay the expense but also, the expense has to have occurred. This can be seen in the instructions for medical expense deductions. If you pre-pay for a medical procedure, you can’t deduct the entire cost, you can only deduct the proportion of the cost that can be allocated to the portion of the work that has been performed. (In other words, if you pre-paid for an orthodontics program that will take three years to accomplish, you can only deduct 1/3 of the cost per year even though you pre-paid the entire cost.)
That same principle applies to mortgage interest. Because points are a form of mortgage interest, you can only deduct them when the interest is actually paid. If you pre-pay the interest, you deduct it over the life of the loan. (There are, of course, special conditions under which you can deduct the points fully in the year you paid them, but this is the exception to the rule, and not the rule itself.)
Because you are deducting the points over the life of the loan, you can deduct the remaining points when the loan ends (you don’t lose the remaining deduction, because you did pay the points originally). When you refinance with a new lender, you are closing out and fully paying off the old loan. But when you refinance with your existing lender, there is a gray area; are you closing the loan and making a new loan or are you modifying the existing loan? Even if it looks like a new loan on paper, is it really just a modification of the existing loan in reality? I suspect that this is the reason that you can’t deduct the remaining points when you refinance with your original lender; the IRS has made a blanket rule rather than having to look at the specific facts of every single refinance.
