When buying a home, you’ll often encounter “points” as part of closing costs. Mortgage points are prepaid interest you pay upfront to lower your loan’s interest rate. One point usually equals 1% of your mortgage amount. These can be discount points, which reduce your interest, or loan origination points, fees covering lender costs. Both are considered prepaid interest and may be deductible on your taxes.
To deduct points fully in the year paid, your loan and payment must meet IRS criteria outlined in IRS Publication 936. Key requirements include the loan being secured by your main home, points reflecting a customary and reasonable charge, payment made in cash or equivalent (not rolled into the loan), and clear documentation on your closing statement (e.g., Closing Disclosure).
For a home purchase, meeting these conditions allows you to deduct the entire cost of points on Schedule A of your Form 1040 when itemizing deductions. However, if you refinance your mortgage, you generally must spread (amortize) the deduction over the life of the loan. For example, if you pay $3,600 in points on a 30-year refinance, you deduct $120 annually ($3,600 ÷ 30).
If you sell or refinance again before the loan matures, any remaining unamortized points can be deducted in that tax year.
Additional details:
-
If the seller pays your points, they are treated as paid by you for deduction purposes, but the points reduce your home’s cost basis, affecting capital gains tax if you sell later. Learn more about Seller-Paid Points.
-
You can find your points amount on Form 1098 (Mortgage Interest Statement) or your Closing Disclosure.
-
Deducting points only benefits you if you itemize deductions; compare this with the standard deduction to see which saves more.
For more about mortgage points, visit our detailed glossary entry on Mortgage Points.
References:
Disclaimer: This article is informational only, not tax advice. Consult a tax professional for personalized guidance.