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Deducting mortgage points: Are mortgage points tax deductible?

6 min read


6 min read


Tax Schedule A for deducting mortgage points

If you’re paying or have paid mortgage interest in advance, you may be able to qualify for a tax deduction. Read on to discover the details of this potential tax deduction.

What are mortgage points?

As a homeowner, you might come across something called mortgage points. They are a form of prepaid interest you can pay upfront in exchange for a lower interest rate and monthly payments. This practice is known as buying down your interest rate.

Buyers purchase points at the time of the closing. Points increase up-front costs, but offer long-term savings over the life of the loan, especially for long-term home ownership on mortgages with fixed rates.

Mortgage points are also known as:

  • Loan origination fees
  • Loan discounts
  • Buying down a rate
  • Maximum loan charges
  • Discount points

A point equals 1% of the mortgage loan amount. For example, on a $300,000 loan, one point would be $3,000, resulting in a lower monthly payment.

Note: This deduction differs from the mortgage interest tax deduction.

Are mortgage points tax deductible?

Good news! Mortgage points are tax deductible, but there are some considerations to keep in mind.

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When can I deduct prepaid mortgage interest points?

There are two options for deducting pre-paid points. Generally, you may deduct mortgage points over the life of the loan but under certain exceptions you may deduct in the year paid.

Let’s go through specifics:

Deducting mortgage points in the year paid

You can deduct mortgage points in the year paid if you meet all the following nine tests:

  1. The loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.)
  2. The loan is for buying or building your primary residence (the one you live at most of the time).
  3. The points paid are a percentage of the principal mortgage amount.
  4. The number of points deducted weren’t more than the points generally charged for your area.
  5. It is a common business practice to pay points in the area where the loan was made.
  6. You must have paid (plus any points the seller paid) at least as much as the points charged. You paid the points from your own funds, not from the loan proceeds.
  7. The points were not paid in place of amounts that are ordinarily stated separately on the settlement statement (i.e. closing documents), such as appraisal fees, mortgage note preparation, title insurance, notary or legal fees.
  8. The points are clearly listed on your closing documents, like a Closing Disclosure Statement or Form HUD-1.
  9. You use the cash method of accounting (which most people do).

Note: If the seller paid points on your behalf, you can still deduct them, but you must reduce the cost basis by the amount of the points paid.

Deducting mortgage points equally over the life of the loan

If you do not meet the tests for deducting in the year paid (or meet the tests and choose not to deduct in the year paid), you can deduct mortgage points ratably (i.e. equally) over the life of a loan if the points are for:

  1. A refinance (or re-fi) of a home mortgage
  2. A loan on a second home
  3. A home improvement used over the course of the life of the loan. You can do this in the year you paid them with your own funds if you use part of the refinanced mortgage proceeds to improve your main home.

Usually, you must amortize mortgage points deducted over the life of the loan using the original issue discount (OID) rules. An OID occurs when a bond or other debt instrument is sold below its redemption price, creating a discount from its face value.

Since OID rules are complex, you can use a simplified method. With this method, you can deduct the points equally year-to-year if you meet the following 5 tests:

  1. You use the cash method of accounting. (Related: Learn more about cash vs. accrual accounting.)
  2. You secured the loan with your home.
  3. The loan’s length is 30 years or less.
  4. For loans with a term longer than 10 years, the loan terms must be the same as other loans offered in your area for the same or longer period.
  5. Either:
    1. The initial loan amount was $250,000 or less; or
    1. You paid no more than four points for a loan of 15 years or less; or 
    1. You paid no more than six points for a loan longer than 15 years.

Can you deduct seller-paid points? 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.

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What if your 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 old 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.

How to deduct mortgage points on taxes

Mortgage point deductions are reported on Schedule A of Form 1040 to itemize your deductions. If you take the standard deduction, you can’t deduct points. (Related: Standard deduction vs. itemized deductions: What’s the difference?)

The process of deducting mortgage points is as follows:

  1. Get Form 1098 from your lender. Box 6 of the form shows the amount you paid in mortgage points over the course of a year tax.
  2. Put the amount from Form 1098 on line 8A of Form 1040 Schedule A.
  3. If you had any mortgage points not on Form 1098 or have amortized points, write that extra amount on line 8C of Schedule A.

Owning a home requires a little extra tax legwork, but it often is worth it to pursue tax breaks. If you’re looking to take valuable deductions or credits, H&R Block can help. 

Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible.

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