Deducting Mortgage Points

Mortgage points are also known as:

• Loan origination fees
• Maximum loan charges
• Loan discounts

What are mortgage points? They’re equal to mortgage interest paid up front when you receive your mortgage. One point equals 1% of the mortgage loan amount. 

Are mortgage points deductible? To deduct points as mortgage interest, you must pay points only for the use of money. You can’t deduct fees paid to cover services like:

• Lender’s appraisal fee
• Notary fees
• Mortgage note preparation

Since mortgage points represent interest paid in advance, you usually must deduct them over the life of the loan. However, you might be able to deduct all the mortgage points you gained to pay for buying or improving your main home. You would do this in the year you paid the points.

Deducting Mortgage Points in the Year Paid

You can fully deduct mortgage points in the year you paid them if all of these apply:

• You’re using a cash method.
• You secured the mortgage loan with your main home.
• The charging of mortgage points is an established practice in the area.
• The points paid weren’t more than the number of points usually charged in the area.
• The points weren’t paid in place of amounts usually stated separately on the settlement statement, like:
  • Appraisal fees
  • Inspection fees
  • Title fees
  • Attorney fees
  • Property taxes
• You didn’t borrow the funds used to pay the points. You can’t deduct mortgage points if the lender withheld the amount of the points from the loan proceeds.
• You used the mortgage points to buy or build your main home.
• The settlement statement — usually a HUD-1 — clearly states the amount of points paid in connection with the closing.
• The points are shown as a percentage of the amount of the mortgage principal.

If you don’t meet any of these conditions, you must deduct mortgage points over the life of the loan. To learn what you can do with your points, see Publication 17: Your Federal Income Tax at www.irs.gov. See the flowchart in the Interest Expense chapter.

You can still deduct the mortgage points over the life of the loan even if both of these apply:

• You qualify to deduct all mortgage points in the year you paid them.
• You don’t benefit from itemizing deductions for the mortgage’s first year.

Ex: Avery bought his first home in November 2018, and he’s filing as head of household. He paid three points ($3,000) to get a 30-year $100,000 mortgage, and he made his first mortgage payment on Jan. 1, 2019. For 2018, his itemized deductions — including points paid — total only $3,700. This is less than his standard deduction. Since his standard deduction is more, he can deduct his points over the life of the mortgage loan.

Deducting Mortgage Points Over the Life of the Loan

You must deduct mortgage points over the life of a loan if either of these applies:

• You paid points to refinance a home mortgage — also known as a re-fi.
• The points are for a second home you bought.

You can fully deduct the part of the mortgage points for an improvement. You can do this in the year you paid them with your own funds if both of these apply:

• You use part of the refinanced mortgage proceeds to improve your main home.
• You meet the first six points under Deducting mortgage points in the year paid (above).

You can deduct the rest of the mortgage points over the life of the loan.

Usually, you must amortize mortgage points deducted over the life of the loan using the original issue discount (OID) rules. Since OID rules are complex, you can use a simplified method. You can deduct the points equally over the life of the loan using the simplified method if all of these apply:

• You use the cash method of accounting. This is the most common method.
• You secured the loan with your home.
• The loan’s length isn’t more than 30 years. For loans more than 10 years, the loan’s terms must be the same as other loans offered in your area for the same or longer period.
• Either:
  • The loan amount is $250,000 or less.
  • You paid no more than four points for a loan of 15 years or less. 
  • You paid no more than six points for a loan longer than 15 years.

Loan Ends Early

You might deduct mortgage points over the loan’s life and pay the mortgage off early. If so, you can deduct the remaining mortgage points the year you pay off the mortgage. However, you might not be able to do this if you refinance your mortgage. If you refinance with a new lender, you can deduct the remaining mortgage points when you pay off the loan. However, if you refinance with the same lender, you must deduct the remaining points over the life of the new loan. You might be able to claim a deduction for points paid. If so, it’s in addition to the deduction for the normal monthly interest payments you made on both loans.

Seller Paid Points

Points the seller pays for the buyer’s loan are usually considered to be paid by the buyer. So, the buyer can deduct these mortgage points. When you deduct points paid by the seller, you must subtract the amount of points the seller paid from your home’s basis.