Mortgage points can be completely tax-deductible the year which you paid for them if you meet the right criteria. Or else, you might be at a position to deduct your mortgage points over the course of your loan.
Mortgage loan points basically means more upfront cost when making the payments for a home. However, the following interest rate reduction means great savings on your monthly mortgage payments. While there are so many expenses that come with buying a home, it is important to note that some of them such as mortgage points are tax-deductible.
Before claiming mortgage points on your taxes, there are several requirements you need to know about first. Our experts at Pillar Mortgage are here with all you need to know about mortgage points and tax deductions.
What are mortgage points?
Mortgage points: Mortgage points are basically prepaid interest on your loan for you to get a decreased interest rate. The decreased interest rates mean more savings on your monthly payments and possibly on the total amount of interest that you pay over the life of your home loan.
One mortgage point is equivalent to 1% of your mortgage amount. On a $200,000 home loan, one mortgage point will be worth $2,000.
Origination points and discount points are the two types of mortgage points available.
Origination points: Origination points are fees paid to the lender for the purposes of originating and processing the loan.
Discount points: Discount points are prepaid interest that can possibly be deducted from your taxes.
Can you deduct mortgage points from your taxes?
When filing your taxes, you can opt to fill for a standard deduction or itemized deductions. You should obviously go for the option that will save you more money on your taxes eventually.
For you to be in a position to deduct mortgage points, you would have to itemize your deductions.
How to deduct mortgage points from your taxes?
When itemizing your tax deductions, it is possible to claim mortgage points on Schedule A of Form 1040. You will obtain a 1098 form from your mortgage lender that will show how much was paid in loan interest as well as mortgage points.
It will be possible to fully deduct the mortgage points the year you paid them, or have to deduct them over the life of the mortgage. However, this all depends on the circumstances.
If by any chance you are not sure if you qualify for these, you can consult an accountant or look up the requirements on the IRS website.
Deducting mortgage points during the year paid
If you are able to meet these criteria, you can then be in a position to fully deduct your mortgage points the year that you paid them:
- Charging mortgage points is not considered excessive but an established practice in your area compared to local standards.
- The mortgage points were used for your primary residence.
- The mortgage points are recognized as a percentage of the mortgage amount.
- Your settlement statement openly identifies the number of mortgage points paid at closing time.
- The funds that were used to pay your mortgage points were directly from you and not borrowed.
- The mortgage points should not have been used toward services or other fees, such as property taxes or appraisal fees – these would normally be recorded separately in your settlement statement.
Deducting mortgage points over the life of the loan
If you didn’t meet the previous criteria or you paid mortgage points on a mortgage refinance or for a second home, you would have to deduct the mortgage points over the life of the mortgage loan.
It is possible to deduct mortgage points over the life of your home loan if you meet the following criteria:
- If the loan term is 30 years or less – terms over 10 years have to be comparable to others offered locally.
- You should use cash accounting.
- The loan should be secured by a home.
- The loan amount should be either $250,000 or less, otherwise:
Ø For loans of 15 years or less, not more than four points should have been paid.
Ø For loans of 16 years or more, not more than six points should have been paid.
What if I pay off my mortgage loan early?
If you are able to pay off your mortgage early, you can be in a position to deduct the remaining mortgage points during that tax year.
To learn more about mortgage points, how you can deduct them from your taxes and other mortgage services, Pillar Mortgage is here for you. We are ready to help you through every step of the entire mortgage process from start to finish. Call us today!
