Purchasing mortgage points allows you to “buy down” the interest rate on a home loan. Doing so may result in a lower monthly mortgage payment and save you money on interest charges over the long term. The IRS also offers a tax break to eligible taxpayers who buy points on a mortgage. There are two scenarios in which your mortgage points may be tax-deductible. Here’s what you need to know.
A financial advisor could help you create a financial plan for your home buying needs and goals.
What Are Mortgage Points?
The IRS defines mortgage points as “certain charges paid to obtain a home mortgage.” Points can also be referred to as loan origination fees, loan discounts or discount points, depending on how they’re used. Origination points, for example, are points you pay to your lender for making the loan.
Homebuyers may purchase discount points to reduce the interest rate on their loan. As a general rule, one mortgage point is equal to 1% of the mortgage amount. So for every $100,000 you borrow, one mortgage point is worth $1,000.
Points are paid upfront and they’re separate from other costs you might pay at closing. In general, closing costs include things like title insurance, credit check fees, application fees, recording fees and attorneys’ fees.
Are Mortgage Points Tax Deductible?
The IRS allows homeowners to deduct points as mortgage interest when certain conditions are met. Deductions reduce your taxable income for the year, which could result in a smaller tax bill or a larger refund.
Points can be deducted over the life of the loan or in the year they were paid. If you want to deduct points in the year you pay them, you’d have to meet these requirements set by the IRS:
- The loan is secured by your main home, i.e., your primary residence.
- Paying points must be an established business practice in the area where the loan was made.
- Points paid are reasonable for the amount typically charged in that area.
- You pay taxes using the cash method of accounting, meaning you report income in the year you receive it and deduct expenses in the year you pay them.
- Points aren’t paid for other costs associated with home buying, such as appraisal fees, inspection fees or title fees.
- You didn’t borrow the money to pay points from your lender or mortgage broker.
- The loan is used to buy or build your main home.
- Points are computed as a percentage of the principal amount of the mortgage.
- Your settlement statement specifies how much was paid for points.
Ordinarily, the IRS allows you to deduct points in the year paid for loans you take out to improve your main home if you refinance your mortgage and meet the first six conditions outlined above. However, that deduction doesn’t apply to points paid on a home equity loan taken out after December 15, 2017. This exception extends through the 2025 tax year.
If you don’t qualify to deduct points in the year they’re paid, you could still claim a tax deduction over the life of the loan. And you could choose to deduct points over the life of the loan if:
- You’re eligible to deduct points in the year you aid them, and
- Itemizing deductions during the first year of the loan wouldn’t offer any benefit
Comparing your estimated tax benefit from taking the standard deduction versus itemizing can help you decide whether it makes sense to deduct points over the life of the loan. Here are the standard deduction amounts for 2022:
- Single filers: $12,950
- Married couples filing jointly: $25,900
- Married filing separately: $12,950
- Head of household: $19,400
Using an income tax calculator can give you a better idea of which one is likely to yield the larger deduction.
When You’re Required to Deduct Points Over the Life of the Loan
In some instances, the IRS doesn’t give you a choice of when you can deduct mortgage points. Generally, you must take the deduction over the life of the loan if:
- You paid points for a refinance loan, OR
- You paid points on a second home
For that reason, it’s important to consider whether buying points makes sense. Buying points can help you accomplish two things: reducing your monthly mortgage payment and lowering your interest rate. Estimating the lifetime savings on interest – and any potential tax break you’re likely to qualify for – can help you decide if purchasing discount points makes sense.
How to Deduct Mortgage Points on Your Taxes
If you paid mortgage points and you’ve determined that you qualify for a tax break, deducting them is pretty straightforward. You’ll just need to enter in the relevant information from your Form 1098 on Schedule A of IRS Form 1040 when you file. If you use an electronic tax filing software program, you may be prompted for this information automatically.
Form 1098 should be sent to you by your lender and it includes some key details about your mortgage loan, including:
- Outstanding mortgage amount
- Mortgage interest paid for the year
- Return of overpaid interest
- Mortgage insurance premiums paid
- Points paid to the lender
Points are listed in Box 6 of Form 1098 so this is where you’ll for the dollar amount you enter on your taxes. If you did not receive Form 1098, you can contact your lender to ask for a copy. You can also look at your mortgage settlement statement to see how much you paid in points.
Keep in mind that if you pay your mortgage off early, you’ll lose the tax deduction for mortgage points going forward. But you could still deduct them in the year that you pay, assuming you meet the conditions set by the IRS.
Are Mortgage Points Tax Deductible When Paid by the Seller?
Sellers can offer certain incentives to homebuyers to close the deal, including paying points toward the mortgage. Generally, points that a seller pays are treated as being paid by the homebuyer. So if you buy a home and your seller pays points for you, then you could deduct them.
There is a slight caveat, however. If you’re deducting points that were paid by the seller, you have to subtract that amount from your home’s basis. Talking to a tax pro or your financial advisor can help if you’re confused about how to keep track of deductions for seller-paid points.
Buying mortgage discount points could help you to get a better deal on your loan while enjoying some tax savings. Understanding the rules for when mortgage points are tax-deductible can help you to maximize your tax savings as a homeowner.
Mortgage Planning Tips
- Consider talking to your financial advisor about whether it makes sense to buy mortgage points if you’re planning to buy a home. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Keep in mind that mortgage points aren’t the only deduction you can claim as a homeowner. Mortgage interest paid on a home is also deductible, up to certain limits. For 2022, you can deduct the interest paid on loans up to $750,000 in mortgage debt if you’re married and file jointly or $375,000 if you’re single or file separately. This rule applies to mortgages originated after Dec. 15, 2017. Mortgage interest on home equity loans or home lines of credit is only deductible if proceeds were used for home improvements or repairs.
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