Buying a home is an exciting, nerve-racking experience that will have a significant impact on your quality of life, not to mention your finances. While securing a mortgage, you will be introduced to various financing tools to help you secure your new home. One of these tools used in financing is mortgage points, also known as “discount points.”
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What’s The Point?
Mortgage points are fees paid directly to the lender at closing in exchange for a reduced interest rate. One point equals 1 percent of your mortgage amount and may reduce your mortgage interest by 0.25 percent, and all points can be deducted in the year that they are paid as long as you meet all the following requirements:
- You are using your main home to secure your loan (meaning that the home you took the loan out on is the home you are living in the majority of the time).
- Points are paid in the area where the loan originated.”
- The points paid didn’t exceed that the amount generally charged in that area.
- The cash method of accounting is used, which means income is reported in the year you receive it and expenses are deducted in the year you pay them.
- The points paid weren’t for items listed separately on the settlement sheet (appraisal, title, attorney or inspection fees, property taxes, etc.).
- The funds you provided prior to closing, including any points paid by the seller, were at least as much as the points charged (you can’t borrow the funds from your lender or mortgage broker to pay the points).
- Your loan is used to buy or build your primary home.
- The points were computed as a percentage of the principal amount of the mortgage.
- Your settlement statement clearly shows the points.
You can also fully deduct points paid (in the year paid) on a loan to improve your main home if you meet requirements one through six (as listed above). Points that don’t meet the above requirements can be deducted ratably over the life of the loan.
Homeowners can also deduct points paid for refinancing only during the life of the new mortgage. If you use a portion of the refinanced mortgage proceeds for improvements to your main home and you meet the first six requirements above, you can deduct (in full) the part of the points related to the improvement in the year they were paid with your own funds. The remainder of the points can be deducted over the life of the loan.
Points that can’t be deducted include those charged for services such as preparation costs for a mortgage note, appraisal fees or notary fees.
Getting To The Point
The seller can’t deduct points paid as interest on his or her return, but the points are a selling expense that will reduce the amount of gain. The buyer may deduct points paid by the seller if the buyer subtracts the amount from the basis or cost of the residence. Any points you pay on loans secured by your second home can only be deducted over the life of the loan.
Email Rea & Associates or reach out to any member of our firm’s real estate team to learn more.
By Chris Axene, CPA (Dublin office)