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Are Mortgage Points Tax Deductible?

Mortgage points, also known as discount points or origination fees, are fees paid to a lender to reduce the interest rate on a home loan. Whether or not these upfront fees are tax deductible depends on your specific situation.

So are mortgage points tax deductible? Mortgage points are tax deductible under certain conditions. The IRS allows full deduction of points in the year paid if they meet nine specific criteria, including that the loan is secured by your main home and that the points don’t exceed the typical amount charged in your area. Points on second homes or refinance loans must be deducted over the loan term.

Mortgage Points

What Are Mortgage Points?

Mortgage points are essentially prepaid interest you pay to receive a lower interest rate on your home loan

point is equal to 1% of your mortgage amount. So if you take out a $200,000 mortgage, 1 point would cost $2,000. 

Mortgage lenders offer mortgage points as a way for borrowers to reduce their interest rate and monthly payments. Each point purchased reduces the interest rate by 0.25%.

There are two main types of mortgage points:

1. Discount Points

Discount points refer to points paid simply to receive a lower interest rate on your loan. For example, buying 2 discount points on a $200,000 loan would lower your interest rate by 0.5%.

2. Origination Points

Origination fees are points charged by the lender to cover loan processing costs. Even if you don’t pay discount points, you may still have to pay origination points.

Are Mortgage Points Tax Deductible?

In certain situations, yes – mortgage points can be tax deductible. Since points represent prepaid interest, they are treated as deductible mortgage interest by the IRS if you itemize your deductions.

However, there are specific IRS rules you must follow for the points to qualify as deductible interest. We’ll cover those in more detail shortly.

How to Deduct Mortgage Points on Your Tax Return

To deduct mortgage points, you must itemize deductions on Schedule A of Form 1040. 

Report the amount paid in points in the section for home mortgage interest. Make sure to specify which points were for your main home purchase and which were for a second home, as limits apply on deducting points for second homes.

Keep documentation showing the amount of points paid, such as the Loan Estimate, Closing Disclosure, or settlement statement from closing.

What Are the IRS Rules for Deducting Mortgage Points?

The Internal Revenue Service allows you to fully deduct points in the year paid only if you meet all of the following tests:

  • Your loan is secured by your main home. Points on second homes must be deducted over the loan term.
  • Paying points is common in your area – it’s an established business practice.
  • Your points don’t exceed the amount typically charged in your area.
  • You use the cash method of accounting for reporting income and deductions. 
  • The points were not for fees like appraisal or attorney costs.
  • You paid the points from your own funds, not money borrowed from your lender. 
  • You used the loan to buy, build, or substantially improve your main home.
  • The points were clearly labeled as such on your settlement statement.
  • The points were calculated as a percentage of the loan amount.

If you don’t meet all the tests, you must deduct the points over the life of the loan.

Can You Deduct Refinance Points on Your Taxes?

You may be able to fully deduct points paid when you refinance your mortgage if you meet the first 9 tests above. 

However, keep in mind that refinance points for a second home cannot be fully deducted in the year paid – they must be deducted over the loan term.

Points paid on home equity loans originated after December 15, 2017 also cannot be fully deducted unless the proceeds were used to substantially improve your main home.

What Are the Limitations and Restrictions on Deducting Mortgage Points?

There are a few key limitations to be aware of:

  • There is a cap on the total amount of mortgage points you can deduct each year based on your home acquisition debt. This debt includes your main home and second home mortgages.
  • For joint filers, the limit on deductible home acquisition debt is $750,000 ($375,000 if married filing separately). So your total deductible points would be capped based on those amounts.
  • You can only deduct points on a loan secured by your main home and second home – not other properties like investment properties. And the points for your second home must be deducted over the life of the loan, not upfront.
  • If you are subject to the AMT (Alternative Minimum Tax), your ability to deduct points may be limited.

Examples of When You Can and Cannot Deduct Mortgage Points

Let’s take a look at some examples to see when mortgage points are deductible and when they’re not:

  • Jim paid $3,000 in discount points when he purchased his main home this year. He meets all the IRS requirements, so he can fully deduct the $3,000 on his tax return for the year.
  • Nina paid $2,500 in origination fees on a refinance of her second home. Because this is a second home, Nina must deduct the $2,500 over the life of the loan, not upfront.
  • Mark paid $6,000 in points when he refinanced his main home. But he used $3,000 of the loan proceeds for home improvements. Since Mark met the other IRS requirements, he can fully deduct the $3,000 in points related to the home improvements. The other $3,000 must be deducted over the loan term.
  • Susan paid $5,000 in points on a home equity loan used to remodel her kitchen. However, the loan was taken out in 2019 so the points cannot be fully deducted upfront. She must deduct the $5,000 over the life of the loan.

Should You Buy Mortgage Points?

Whether or not it makes sense to pay points depends on your specific situation. Here are some pros and cons to weigh:

Potential Advantages of Paying Points:

  • Can get a lower mortgage rate, reducing total interest paid over the loan term.
  • Points may be tax deductible, providing some tax savings.
  • Makes sense if you plan to stay in the home long-term.

Potential Disadvantages of Paying Points:

  • Adds to your upfront closing costs on a mortgage.
  • Deductibility limits may reduce the tax benefit.
  • Won’t provide as much savings if you move before the break-even period.

Deciding Whether to Buy Mortgage Points

When deciding if you should pay points on a mortgage, here are some key factors to consider:

  • How much will points reduce your interest rate and monthly payment?
  • How long do you expect to keep the mortgage? 
  • Will you reach the break-even point where the savings from the lower rate exceed the cost of the points?
  • What are current mortgage rates? Points make more sense when rates are higher.
  • Can you comfortably afford to pay the points upfront?
  • How much mortgage interest can you deduct based on your itemized deductions?

Discuss paying points with your mortgage lender or financial advisor to determine if it’s a smart move in your situation. Crunch the numbers to see if the interest savings outweigh the costs.

While mortgage points can provide savings through lower rates and tax deductions, make sure your decision aligns with your financial situation and goals. Carefully evaluate the short and long-term tradeoffs to determine if purchasing points is right for you.

Frequently Asked Questions(FAQ)

How do I claim my mortgage points on my taxes?

Claiming mortgage points on taxes is a way to deduct the amount of points paid during the purchase or refinance of a home. Points paid are typically deductible in the year they are paid, as long as the loan is used to buy or improve a primary or secondary residence. To claim mortgage points on taxes, homeowners should use IRS Form 1098, which will be provided by their lender.

Are all mortgage points tax deductible?

No, not all mortgage points are tax deductible. Mortgage points are generally considered a form of prepaid interest, and the IRS allows taxpayers to deduct the points they paid for a primary residence or a second home in the year the loan was taken out. However, points paid for refinancing a mortgage are generally not deductible, unless the loan is used to purchase or improve the home.

Are closing costs and points tax deductible?

Yes, closing costs and points are tax deductible for those who itemize deductions on their federal tax return. Closing costs and points are treated as mortgage interest and are reported on IRS Form 1098. Generally, the costs must be for a home loan used to buy, build, or improve a primary residence in order to be considered tax deductible.

Can you deduct points on a mortgage over 750000?

No, you cannot deduct points on a mortgage over $750,000. According to the Internal Revenue Service (IRS), points paid for a mortgage over $750,000 are not deductible in the same way as points paid for a mortgage under $750,000. The IRS states that points paid for a mortgage over $750,000 are considered to be additional interest, and are therefore not tax-deductible.