The mortgage points deduction may help cut your federal tax bill. When you purchase a home, you can use points—also known as loan origination or discount points—to obtain a lower interest rate from the lender by making an upfront payment. Since mortgage interest is deductible, your points, as part of your closing costs, may be, too.
You might be able to deduct all of your points in the year that you pay them if you use Schedule A of IRS Form 1040 for itemized deductions. Lucky for you, the IRS doesn’t care whether you or the homeseller paid the points. Either way, those points are your deduction, not the sellers’. Tip: Tax law treats home purchase mortgage points differently from refinance mortgage points. Refinance loan points get deducted over the life of your loan. For a 10-year refinance, you can deduct $100 annually on your Schedule A if you paid $1,000 in points.
Unlocking the Mystery of Mortgage Points and Tax Deductions
Buying a home is a significant milestone, and navigating the intricacies of mortgages can be overwhelming. One aspect that often sparks confusion is the concept of mortgage points. These upfront payments can lower your interest rate, but do you know if you paid them and whether you can claim them as a tax deduction? Let’s delve into the world of mortgage points and uncover the answers you seek.
What are Mortgage Points?
Mortgage points, also known as loan origination points or discount points, are essentially prepaid interest. By paying a certain percentage of your loan amount upfront, you can secure a lower interest rate on your mortgage, potentially saving you thousands of dollars over the life of the loan.
Do I Know If I Paid Points?
The answer lies within your loan documents. Typically, your lender will provide you with a Closing Disclosure statement, which outlines all the costs associated with your mortgage, including points Look for an entry labeled “Points” or “Loan origination fees” If you see an amount listed, congratulations, you paid points!
Can I Deduct Mortgage Points on My Taxes?
The good news is that, in most cases, you can deduct the points you paid on your mortgage when you itemize deductions on your federal income tax return. This means you can reduce your taxable income and potentially lower your tax bill. However, there are certain conditions you must meet to qualify for the deduction.
The Fine Print of Mortgage Points Deduction
To claim the mortgage points deduction, your loan must meet the following criteria:
- Primary Residence: The mortgage must be used to purchase or build your primary residence, which is the home you live in most of the time.
- Customary Practice: Paying points must be a customary business practice in your area. The amount you pay cannot exceed the percentage typically charged.
- Legitimate Points: The points must be genuine and not disguised fees for other services.
- Direct Payment: You must have paid the points directly, not borrowed the funds from your lender.
- Percentage Calculation: Points are calculated as a percentage of your mortgage amount.
- Documentation: The points must be listed as “points” on your Closing Disclosure statement.
Where to Deduct Points on Your Tax Return
If all conditions are met, you can claim your mortgage points as a tax deduction on Schedule A of Form 1040, which is the form used for itemizing deductions. Locate the line for “Mortgage interest and points” under the “Itemized Deductions” section. ” Enter the amount of points you paid in the designated box.
Additional Considerations
- Refinance Points: Points paid on a refinance loan are not fully deductible in the year you pay them. Instead, you deduct them over the life of the loan.
- Seller-Paid Points: If the seller paid the points, you can still deduct them as long as you meet the other eligibility criteria.
Unveiling the Secrets of Mortgage Points
By understanding the ins and outs of mortgage points, you can make informed decisions about your home financing and potentially reap tax benefits. Remember to consult with a tax professional for personalized guidance on your specific situation. Now, go forth and conquer the world of mortgage points!
Where to Deduct Points
Figured out that your points are deductible? Here’s how you deduct them:
Your lender will send you a Form 1098. Look in Box 2 to find the points paid for your loan.
If you don’t get a Form 1098, look on the settlement disclosure you received at closing. Depending on who paid the points, the points will appear on that form in the sections that describe your costs or the sellers’ costs.
Report your points on Schedule A of IRS Form 1040.
The Fine Print for the Mortgage Points Deduction
The IRS rules for the mortgage points deduction for a home purchase are straightforward, but lengthy. You must meet each of these seven tests to deduct the points in the year you pay them.
1. Your primary residence must be the purchase or construction of your mortgage, and the loan must be secured by that property. Your primary home is the one you live in most of the time. Your primary dwelling can be a house, a trailer, or a boat as long as it has a toilet, cooking appliances, and a place for you to sleep.
Points paid on a second home have to be deducted over the life of your loan.
2. Paying points must be a customary business practice in your area. And the amount can’t exceed the percentage normally charged. You cannot pay ten points and then deduct them if the majority of people in your area only pay one or two points.
3. Your points have to be legitimate. Other items on your settlement statement, such as property taxes, attorney fees, appraisal fees, inspection fees, title fees, and service fees, cannot be designated as “points” by your lender and subtracted from your total.
4. You must pay the points directly. That is, you can’t have borrowed the funds from your lender to pay them. Any points paid by the seller are treated as being paid directly by you.
Additionally, as long as the amount you pay is equal to or greater than points, money you pay—such as a down payment or earnest money deposit—is regarded as money out of your pocket that covers the points.
Say you put $10,000 down and pay $1,000 in points. Since the down payment is greater than the points, you can deduct the points if you itemize. Under the mortgage points deduction, $1,000 would not be deductible if you paid one point but made no down payment.
5. Your points have to be calculated as a percentage of your mortgage. One point is 1% of your mortgage amount, so one point on a $100,000 mortgage is $1,000.
6. The points have to show up on your settlement disclosure statement as “points. ” They might be listed as loan origination points or discount points.
Advice: If you pass the first five tests listed above, you can also fully deduct the points you pay (for the year paid) on a loan to renovate your primary residence.
Paying Points on a Mortgage EXPLAINED / Origination and Discount Fees
FAQ
How do you know if you paid points when you took out a loan?
Where are points paid on closing disclosure?
Where can I find points paid on refinance?
What are mortgage points?
Mortgage points are the fees a borrower pays a mortgage lender to get a lower interest rate on their loan. Doing so lowers the overall amount of interest they pay over the mortgage term. This practice is sometimes called “buying down the interest rate.” Each point the borrower buys costs 1 percent of the mortgage amount.
How many points do you have to pay for a mortgage?
Typically, one point is equal to 1% of the loan’s principal, and it usually buys the rate down by 0.25%. So, you might have to pay four points to reduce your rate by a full percent. Example. Say you buy one point on a mortgage loan of $300,000, which costs $3,000 (1% of the loan amount). The initial interest rate was 3%.
Are mortgage points worth it?
Mortgage points offer both benefits and drawbacks: Lower interest rate: By purchasing mortgage points, you’re lowering the interest rate on your loan, which translates to lower monthly payments and less total interest paid over the loan term. Tax deduction: If you itemize your tax deductions, you could deduct the cost of points.
Should you pay points on a home loan?
By paying points, you pay more up front, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice if you plan to keep your loan for a long time. One point equals one percent of the loan amount. For example, one point on a $100,000 loan is one percent of the loan amount, which equals $1,000.