If you want to enjoy deductions on federal tax bills, mortgage point deduction is a terrific way to claim it. At times, it is sometimes called discount points or origination points; you get a lower interest rate on making an upfront payment when you buy a house.
Mortgage interest is deductible, which makes your point (part of your closing cost) deductible as well. You might, however, take itemized deductions on Schedule A of Form 1040, which qualifies you to deduct your entire point for the year.
Interestingly, the IRS is not interested in who paid the points – whether you or the home seller. The point’s deduction will come to you.
Things to Note about Mortgage Points Deduction
There are many rules for the mortgage point guiding a home purchase. To qualify, however, you need to meet each of the criteria to qualify:
You must direct the mortgage to buy or build a house that will be your primary residence. This residence will act as security for the loan. This primary house is the one you lived in mostly. Your principal residence could be a house, boat, or a trailer as long as it has a toilet, cooking utensils, and you can sleep comfortably inside.
In your area, it should be a customary business practice to pay points. This value cannot rise above the percentage typically charged. As a result, if the highest payment value in your vicinity is 2 points, paying 10 points and deducting them later is not allowed.
You need to operate legitimate points. If your lender has other items like title fees, inspection fees, attorney fees, property taxes, appraisal fees, etc., on your settlement statement, you cannot deduct them.
The points should be paid directly. With this, you cannot borrow the funds from your lender to pay them. All points that the seller paid will be treated as a payment from you directly.
Also, every fund you paid, like downpayment, earnest money deposits, etc. are treated as out of pocket funds. These funds cover the points provided the amount is equal to or more than points.
Let us assume that you paid $5,000 and paid $1000 in points. The points are not up to the down payments, which cover your point. As a result, itemizing qualifies you to deduct.
The calculation of your point is based on a percentage of your mortgage. A single point is just 10% of your mortgage amount. As a result, one point of $200,000 is $2,000.
Your settlement disclosure statement will reveal the points as “points.” It might also be called discount points or loan origination points
Where to Deduct Points
Decide if you can deduct your points. The following explains how to remove it:
You will get Form 1098 from your lender.
Check box 2 to get the points paid as a loan
For people that did not get a Form 1098, the settlement disclosure reached during the closing will reveal the point. You will see the points in the section that will spell up your costs or the seller's costs.
You will use Schedule A of IRS Form 1040 to report your points.
Bear in mind, however, that there are two items related to points that cannot be deducted
Interest buy-downs paid by your builder
Like buyer incentives, some builders prefer to direct funds in an escrow account. Lenders will access this account every month to support their mortgage payment. These are not points, even though the money was directed to interest payment and it's prepaid. The funds directed into the escrow amount by the builder cannot be deducted.
Interest payments from government programs
For people having financial issues, they cannot deduct points paid by local, state, or federal program like the federal Hardest Hit Fund.
