This financial guide explains when and to what extent points paid when purchasing a home or refinancing a mortgage may be deductible under U.S. federal tax rules. It covers the general rules, special circumstances, and situations that may affect the deduction.
Table of Contents
- What Are Points?
- Tests for Deductibility
- Non-Deductible Amounts
- Points Paid by Seller
- Funds Provided Are Less Than Points
- Excess Points
- Points Paid on a Second Home
- Mortgage Ends Early
- Points Paid on Refinancing
- Limits on Home Mortgage Interest Affect Points
- Form 1098
What Are Points?
For more information about the deductibility of home mortgage interest, see our guide to Home Mortgage Interest Deductions.
The term “points” describes certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.
Points are generally treated as prepaid interest. If you itemize deductions on Form 1040, Schedule A, you may be able to deduct qualifying points as home mortgage interest. The amount deductible depends on the purpose of the loan, the applicable mortgage-interest limits, and whether the points qualify for an immediate deduction or must be spread over the loan term.
A borrower may be treated as having paid points that the home seller pays on the borrower’s behalf. See the section on Points Paid by Seller for more information.
Tests for Deductibility
Generally, points are prepaid interest, so they must be deducted over the life of the mortgage rather than entirely in the year they are paid.
However, you may be able to deduct qualifying points in full in the year paid if all the following conditions are met:
- The loan is secured by your main home—the home where you live most of the time.
- Paying points is an established business practice in the area where the loan was made.
- The points paid do not exceed the amount generally charged in that area.
- You use the cash method of accounting, which is used by most individual taxpayers.
- The points are not paid in place of amounts ordinarily listed separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes.
- The loan is used to buy or build your main home.
- The points are calculated as a percentage of the mortgage principal.
- The amount is clearly identified as mortgage points on the settlement statement. The points may be shown as paid from either your funds or the seller’s funds.
- The funds you provide at or before closing, together with any points paid by the seller, are at least equal to the points charged. Your funds may include a down payment, escrow deposit, earnest money, or other amounts paid at or before closing. They do not have to be applied directly to the points, but they cannot be borrowed from the lender or mortgage broker.
Home improvement loans: Points paid on a loan to improve your main home may also qualify for a full deduction in the year paid if the first five conditions above are met.
Important: These rules are based on U.S. federal tax guidance. Eligibility depends on the facts of the transaction and the tax rules applicable to the year concerned.
Non-Deductible Amounts
Charges imposed by a lender for specific services connected with a mortgage are not generally treated as interest or deductible points. Examples include:
- Appraisal fees
- Notary fees
- Preparation costs for the mortgage note or deed of trust
- Mortgage insurance premiums
- VA funding fees
These amounts generally cannot be deducted as points, either in the year paid or over the life of the mortgage. Their tax treatment may depend on the type of charge and the applicable rules.
Points Paid by Seller
Points may include loan placement fees that a seller pays to a lender to arrange financing for a buyer.
The seller generally cannot deduct these fees as mortgage interest. Instead, qualifying seller-paid points are treated as a selling expense that reduces the seller’s amount realized from the sale.
The buyer generally reduces the home’s tax basis by the amount of seller-paid points and treats those points as if the buyer had paid them. If all the required tests are met, the buyer may deduct the points in the year paid. Otherwise, the deduction generally must be spread over the life of the loan.
Funds Provided Are Less Than Points
If you meet all the deductibility tests except the requirement that your funds and the seller-paid points equal or exceed the points charged, you may deduct points in the year paid up to the amount of qualifying funds you provided. You may also deduct qualifying points paid by the seller.
Example 1: You take out a $100,000 mortgage to buy a home in December and are charged one point, equal to $1,000. You meet all nine tests except that the only funds you provide at or before closing are a $750 down payment. You may deduct $750 of the points in the year paid and generally spread the remaining $250 over the life of the mortgage.
Example 2: The facts are the same, except the seller also pays one point, equal to $1,000, to help you obtain the mortgage. You may deduct $1,750 in the year paid: the $750 supported by your funds plus the $1,000 paid by the seller. You must also reduce the home’s tax basis by the $1,000 paid by the seller.
These examples illustrate the general rule; the deduction should be confirmed against the tax law applicable to the relevant year.
Excess Points
If you meet all the tests except that the points paid exceed the amount generally charged in your area, you may deduct only the amount generally charged in the year paid. The excess generally must be deducted over the life of the mortgage.
Points Paid on a Second Home
The rule allowing an immediate deduction generally does not apply to points paid on a mortgage secured by a second home. These points generally must be deducted over the life of the loan, subject to applicable home mortgage interest rules.
Mortgage Ends Early
If you have been deducting points over the life of your mortgage, you may generally deduct the remaining balance in the year the mortgage ends. This may occur when the mortgage is prepaid, refinanced, foreclosed, or otherwise terminated.
An exception may apply if you refinance with the same lender. In that case, the remaining points generally continue to be deducted over the term of the new loan rather than being deducted immediately.
Example: Dan paid $3,000 in points on a 15-year mortgage in 2008 and was required to spread the deduction over the loan term. He deducts $200 per year. By the end of 2019, he has deducted $2,200. If he pays off the mortgage in full in 2019, he may generally deduct the remaining $800 in that year, assuming the applicable rules allow it.
Points Paid on Refinancing
Points paid to refinance a mortgage generally cannot be deducted in full in the year paid, even if the new mortgage is secured by your main home. They are generally deducted over the life of the new loan.
If part of the refinanced loan proceeds is used to improve your main home, however, the portion of points attributable to the improvement may qualify for an immediate deduction if the relevant requirements are met. The remaining points generally must be spread over the loan term.
Example 1: Bill obtained a mortgage to buy his home in 1999 and refinanced it in 2019 with a 15-year, $100,000 mortgage. He paid three points, totaling $3,000. Two points, or $2,000, represented prepaid interest; the remaining $1,000 was a fee for services that would ordinarily be listed separately on the settlement statement. Bill paid the charges with his own funds, and the points were customary in his area and not excessive.
Bill used the new loan to repay his existing mortgage. Because the refinancing was not used to purchase or improve the home, he did not meet all the tests for an immediate deduction. The $2,000 in qualifying prepaid interest generally had to be spread over the loan term, while the $1,000 service fee was not deductible as points.
Example 2: Assume the same facts, except Bill uses $25,000 of the $100,000 refinancing proceeds to improve his home and $75,000 to repay the existing mortgage.
Under the rules described in the original example, 25% of the $2,000 in qualifying points—$500—would be attributable to the home improvement. The remaining $1,500 would generally be spread over the life of the loan. The exact deduction and timing should be verified under the rules for the relevant tax year.
Note: The source examples use historical dates and calculations. They are included to illustrate the principles and should not be relied on as current-year tax calculations without verification.
Limits on Home Mortgage Interest Affect Points
You may not be able to deduct all points paid on a mortgage if the loan exceeds the applicable limits for the home mortgage interest deduction. The deductible amount depends on the loan balance, the date and purpose of the debt, and the tax rules that apply to the year in question.
The source article refers to historical mortgage-debt limits, including limits for certain acquisition debt and home equity debt. Those figures should not be treated as universally applicable or current without checking the rules for the relevant tax year.
Form 1098
Mortgage interest statements, generally reported on Form 1098, may show the mortgage interest paid during the year and qualifying points that are deductible in the year paid.
If you purchased a main home during the year, Form 1098 may include deductible points paid by you or by the seller. It generally will not show interest paid on your behalf by a government agency.
Form 1098 may include only points eligible for a full deduction in the year paid. Other points may still qualify for a deduction in the year paid or over the life of the loan, depending on the circumstances. Review the settlement statement and relevant loan documents, and confirm the treatment with a qualified tax professional if necessary.
