Mortgages come with “points” – a polite synonym for fees or premiums that
your lender charges for loan origination or refinancing. The math on points is
simple: one point equals 1% of the amount of the loan you take out, two points
equal 2%, and so forth. While the math is easy, the real value of a point is not
always so simply calculated.
There really is a point. Why would you want points? Well, when you buy a
point or two along with your mortgage, you get a lower interest rate and a lower
monthly payment. Pay $3,000 for a point now, and you could save that much and
more later on over the course of the loan.
But it may seem pointless. The problem is, points don’t move when you do.
Who stays in one home for 30 years these days? If you have a 30-year loan and
you sell your home and move five years from now, you lose the points and the
benefits that go with them. The same applies when you refinance. There’s also
the interest rate aspect. Let’s say you buy two points at 6% interest when you
get your mortgage. What if two years later, interest rates fall to 4%? You’ll
regret your purchase.
Are points tax-deductible? Sometimes. Usually, points are amortized over
the duration of your mortgage – that is, paid off in installment payments over
the life of the loan. But you might be able to deduct the cost of these points
at tax time.
If you took out your mortgage to buy or refinance your primary residence, you
could qualify for a deduction in the tax year you took out the loan, if your
loan meets certain conditions. The IRS has a 9-point test, and the key points
are: a) the points must be a percentage of a principal amount clearly defined on
the settlement statement, b) the points can’t be paid in place of separately
stated amounts elsewhere on the settlement statement; c) funds supplied by the
buyer + points paid by the seller must be equal to or greater than points
charged; d) points charged must not be excessive, and e) the charging of points
must be “an established business practice” for such a mortgage. If you buy a
home and the seller pays any points, you can deduct those points.
If you’re refinancing, there is no quick tax break. Points have to be amortized,
unless you are using part of the loan for home improvement. Then a partial
deduction is allowable.
If you’d like more information on mortgages and the financial questions linked
to them, speak with a qualified mortgage professional or financial advisor
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information..