Are Mortgage Points Tax Deductible?

Buying a home is an expensive endeavor, and you want to make sure that your hard-earned money goes towards the purchase of your new home. Learn more about what kinds of mortgage points are generally considered tax deductible and how you can make sure you’re getting the most out of your money.

So are mortgage points tax deductible? In most cases, mortgage points are not tax deductible. However, a few exceptions exist for certain security options and when the points are prepaid in cash.

Mortgage Points

We’ve got all the information on this blog post about whether or not mortgage points are tax deductible. If they’re not, then it’s time for some serious research into other options like FHA loans or VA mortgages.

You don’t want to overpay for something as important as a home or mortgage payments.

Are Points Tax Deductible?

If you’re considering buying a house, it’s important to know that mortgage points are not tax deductible.

The IRS says that most mortgage points paid are not going to be tax deductible, which means your hard-earned dollars will go to your lender rather than the government.

You can use this blog post as a resource when deciding whether or not it would be worth paying extra in order to get the best interest rate possible on your loan.

It’s also helpful if you want to learn more about how taxes work with mortgages and when mortgage points are tax deductible.

Use this blog post to learn how to determine if your desire to pay mortgage points will actually benefit you or not!

Then, get out there and find that dream home!

Benefits of Mortgage Points

Mortgage points are fees paid to a lender in exchange for getting a lower interest rate on your loan.

Mortgage points can be worth it because they help you save money over time by lowering your monthly payments.

  • Mortgage points are still deductible on a primary residence
  • Tax benefits of mortgage points can save you big down the road
  • You can deduct the amount of your mortgage points that exceeds $600
  • Deductions from mortgage point purchases could help reduce your income taxes
  • Internal Revenue Code Section 163, which discusses the tax deductibility of mortgage interest, allows you to claim points as an itemized deduction
  • Mortgage points may be deducted over the term of the loan in a reasonable and systematic manner. Each month that your payments cover part interest and part principal, you can deduct a portion of your point expense.

Should You Pay for Mortgage Points?

It depends on how you approach it.

If you have an ample amount of cash to put down on a home, then maxing out your points could be worth it.

But if you are relying on the bank’s generosity for a loan, then paying any large sums of money up-front might not be in your best interest.

In that case, make sure to do the math—not only for the mortgage point cost itself but also for what would happen if rates rise during the time your loan is outstanding.

Points are paid upfront and charged as a percentage of the total mortgage amount and last anywhere from one to four years before they’re cleared off after closing costs are paid off.

It’s also possible to have the points rolled into the mortgage, where they will mount up interest as if you borrowed those funds in a traditional way.

How Much Does One Point Lower Your Interest Rate?

A point typically lowers your interest rate by .02% of the total loan.

For example,

Assuming the borrower has a $200,000 mortgage and chooses to pay 2 points to lower their APR from 4.5% to 3.65%:

$200,000 x .02 = $4,000

2 Points paid: Paying 2 points on this mortgage would cost you about $4,000 upfront but it will reduce your annual house payments by $288 each year (or over 10 years) which equals an approximate savings of around $2880 for every point paid.

Or, if paying two points is too much in one time period due to cash flow limitations then consider making bi-yearly payments with your tax refund or some other savings.

What Kinds of Points Are Tax Deductible?

Points paid on home purchases are not usually tax deductible.

However, if you borrow money to purchase a second home and the points are only to offset costs such as broker’s fees and other real estate related expenses, then they might be deductible provided that these deductions are not being taken elsewhere.

Fixed rate points (buyer pays upfront for a lower interest rate or more advantageous terms) will likely be deducted from the IRS – however, it is best to consult with an expert before making assumptions because sometimes variable rate points can be deducted too.

Additionally, if you have individual retirement account (IRA), paying mortgage points could disqualify up to $100k of gains in your IRA from qualifying for tax-free treatment when you retire – so this is another case where it’s best to get professional advice.

The Bottom Line …

While paying points on a home can lower your interest rate and make buying your dream home more affordable, you should be aware that in most cases these are not tax deductible.

Speak with an accountant or tax expert before making assumptions to ensure that you don’t pay for something that is not going to lower your tax liability when filing your taxes this year.

Beware of Adjustable-Rate Mortgage Points

One of the risks of adjustable-rate mortgage points is that when interest rates go up, so do your payments!

Additionally, it’s important to know how many points you’re taking on with an ARM.

If you have a 1-point loan, then only 1% of the house cost is going to be attributed as an expense. That means if your mortgage payment was $1,000 and your point cost you $40 per month in total—$480 overall for the lifetime of your loan.

Conventional loans use 2-3 points per loan, but every point will add one percentage to the cost (or just over 1% more). The interest rate isn’t what will determine these expenses either—your APR or Annual Percentage Rate is what’s going to tell you the real story.

The higher your rate of interest—and thus your points—the more money it will end up costing you in the long run.

Get a Smart Mortgage

A Smart Mortgage is a type of loan that factors your income, assets, debt and risk tolerance to determine which mortgage option will best suit you.

With a Smart Mortgage, you’ll get a personalized offer for the type of loan that is most suitable to your specific needs. A Smart Mortgage can also help you get a lower interest rate.

Another benefit is a reduced monthly payment! Therefore, whether you are worried about affordability or just driving down the cost of living on a month-to-month basis, the benefits of getting a Smart Mortgage are endless and well worth taking advantage of today.

Mortgage Points And Tax Deductions

Buying a home is an exciting time, but it can also be stressful. One thing that might not have crossed your mind is whether or not the mortgage points you’re paying are tax deductible.

The IRS says that most mortgage points paid are not going to be tax deductible, which means your hard-earned dollars will go to your lender rather than the government.

You want to know if all those hours spent researching and comparing mortgages were worth it in the end – after all, if they weren’t then there’s a chance you might not be getting the best deal.

Tax deductions are one of the things that everyone wants to know about, but they may just be some of the most confusing and difficult to understand facets in our tax code.

Find out if mortgage points can really make a difference in your financial situation!

Final Thoughts

It’s important to understand the points you are paying on your mortgage and how they might be tax deductible before you get too far into the process.

If most of the points paid aren’t going to be tax-deductible, then this means that your money will go towards interest rather than being taxed by our government.

Make sure that if you’re planning on applying for a new home loan, or have already done so, that you ask about all of these details up front with your lender so there is no confusion later!