If you have decided to purchase a home, you know that your mortgage is one of your largest debts – if not the largest. You may also find yourself paying fees known as “mortgage points”. The good news is, if you have to pay mortgage points you usually can deduct the points when you file your taxes.
Mortgage Points Explained
Each mortgage point is equivalent to 1% of your loan. For example, if you have a $100,000 loan for your home, each point is equal to $1,000. There are two types of points that you need to be aware of – origination points and discount points. Origination points are income for the loan originator and discount points are a form of prepaid interest, which usually can be deducted on your tax return.
Who Qualifies for a Deduction?
The IRS usually allows you to deduct the entire amount of your points during the year the payments are made. However, if your home is more than $1 million, you will be limited on the amount of points that are deductible. This is also true if your home equity debt is larger than $100,000.
Additional Requirements to be Eligible to Deduct Mortgage Points
- The mortgage is for your primary residence
- Points have to be a percentage of your mortgage total
- Points must be normal in your area
- The points must not be excessive in your area
- You have to use the cash accounting method when filing taxes
- The points cannot be used for items that are normally standalone fees
- You cannot be paying for your points with borrowed funds
- You have to itemize your points clearly
In the event that you are unable to deduct points this tax year, you may be able to deduct them over the life of the loan.
Deducting Your Points
Claiming the tax deduction for your mortgage points is simple. You just have to itemize your deductions and claim the points on Form 1040.
- Your lender should send you a Form 1098
- You take the information from line 10 and put it on Form 1040, Schedule A
- If not all of your points were listed on Form 1098, you put the additional amount on line 12 of Form 1040, Schedule A.
Many taxpayers find claiming their points to be easy. However, sometimes it can be confusing, which is why we recommend TurboTax when filing your taxes. They will ask you a few easy questions that will allow you to take the proper deduction for your mortgage points.
Points Add Up
It may seem unwise to pay additional money when you are trying to get a good deal on your home. However, usually lenders reduce your loan rate by as much as 0.25% for each point that you pay in advance. For example, let’s say you go with a 4% mortgage.
Paying two points up front could allow you to drop your rate down to 3.5%. Don’t forget you also get to deduct these points when tax time comes around too. Overall, the longer you plan to reside in your home, the more benefits that you get, with one of the biggest ones being decreasing your monthly interest rate.
More Money Upfront
One of the most pleasant things of looking for a home is being able to find a nice one that is within your price range. However, you don’t want to forget to think about how points will affect your budget. These points will need to be paid up front with your down payment. Therefore, if you go with a home where you will be struggling to make the down payment, points will definitely be a deal breaker. In addition, you have to make sure you follow the guidelines by the IRS or you won’t be able to qualify for a tax deduction.