When securing a mortgage for a home, borrowers often encounter "points," also known as loan discount points. These are upfront payments made to reduce the interest rate on a mortgage. Essentially, paying points can lower monthly mortgage payments over time.
Deductible Points
Under certain conditions, points may be tax-deductible as mortgage interest if you itemize deductions. The key criteria for deduction include:
The loan is used to purchase, build, or improve your primary residence.
The home serves as security for the mortgage.
Paying points is a common practice in your area, and the amount paid aligns with standard rates.
You pay the points yourself at or before closing using your own funds (not borrowed from the lender).
If the seller pays points on your behalf, you can still deduct them as long as you adjust your home's purchase price accordingly.
Non-Deductible Costs
Certain mortgage-related expenses cannot be deducted as interest. These include:
Fees for mortgage note preparation.
Appraisal and notary fees.
Extra points charged in place of other costs, such as property taxes or title fees.
Points paid by a seller on behalf of the buyer (though they may impact the seller’s taxable gain).
Key Takeaway
Understanding mortgage points and their tax implications can help homeowners maximize deductions and reduce tax liability. It’s important to ensure eligibility and follow IRS guidelines when claiming these deductions.