mortgage pointsTax deductions are a hot topic these days. It seems we’re all looking for ways to owe Uncle Sam less and keep more in our pockets. Did you know that mortgage points can be deductible in many situations?

This topic can get a little confusing so let’s start with the basics.

What are mortgage points?

Points are a part of the closing costs for obtaining a mortgage. Paid to the mortgage lender, each point is 1% of the loan value. In the example of a $200,000 home with a $170,000 mortgage, one point of the mortgage would be $1,700.

There are two different types of points. The first is origination points, also known as the origination fee or broker fee. Lenders charge points as a way to make a profit. They are basically used to recover some of the costs of loan origination. Depending on the lending institution, they can be negotiated in part or in full.

The second is known as the discount points. Borrowers pay for discount points in order to obtain a lower mortgage rate. This process is known as a “buy down”. Purchasing one point generally will result in a quarter of a percent (0.25%) reduction in a fixed interest rate and a 0.35% decrease on an adjustable rate loan. Like origination points, these too are negotiable.

How are points deductible?

The IRS allows for the deduction of any extra charges paid by the homebuyer as a part of the closings costs for obtaining a mortgage. Origination points are not deductible because they are part of the mortgage fees and not an extra. Discount points are extra though. They are tax deductible*.

After the homebuyer obtains a mortgage, at the end of the year they will receive a Form 1098 Mortgage Interest Statement. The points paid to purchase the home will appear on the form in Box 2. Discount points can be deducted under “Schedule A” of a 1040 tax form if the homebuyer itemizes the deductions.

What are the eligibility requirements to deduct points?

  1. The loan is secured for your primary residence.
  2. Your primary residence is located in an area in which buying points is practiced.
  3. The price paid for the points was consistent with the prices in the area.
  4. The homebuyer must use the cash method of accounting, in which income is reported the year it is received and then deducted in that year when it’s time to pay.
  5. The points were only used on closing costs, such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes, and no initial fees.
  6. The homebuyer is the one who purchased the points. Points that were outright purchased by the seller, or purchased with money borrowed from the lender or mortgage broker are not deductible.
  7. The loan is being used to buy or build a primary residence.
  8. The points were calculated to be a percentage of the principal amount of the mortgage (i.e. 1%).
  9. The amount appears on the settlement statement (a form known as the HUD-1 Settlement Statement) or Closing Disclosure.

Apart from being all around helpful to most homebuyers during the initial purchase and taxes associated with buying a home, there are other perks of mortgage points. One of the biggest is that the deduction can be spread out over the life of the mortgage. This is especially helpful if you – for one reason or another – do not itemize your deductions. Another major perk is that points can be used for home refinancing.

That’s a lot to take in. Hope you found it helpful. Call me soon at (602) 456-2195 and we can talk more about mortgage points in the home loan process.

Source: Salted Stone

*Skyline Financial Corp. and its loan officers are not tax advisors. Always consult a tax professional for details.

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