Mortgage points paid by a borrower to reduce the interest rate on a home loan may be tax deductible as prepaid interest if they meet IRS criteria. The deduction applies only if the points were paid to buy or improve a primary residence and are not considered a personal expense.
Points are fees charged by lenders to lower the interest rate on a mortgage. They're typically calculated as a percentage of the loan amount-1 point equals 1% of the loan. For example, on a $300,000 mortgage, one point costs $3,000. These fees are often paid at closing and can affect long-term borrowing costs.
The IRS allows taxpayers who itemize deductions to deduct points paid on a mortgage used to buy or build a principal residence. This treatment applies only if the points are paid in connection with the purchase or construction of the home and not for refinancing. Refinancing points are generally not deductible unless they result in a permanent reduction in interest rates and are treated as prepaid interest over the life of the new loan.
To qualify, points must be paid in a manner consistent with standard business practices in the area. The IRS considers whether the amount paid is reasonable compared to local norms. For example, paying 2 points on a $200,000 loan ($4,000) may be acceptable if that's typical in the region. Paying 3 points ($6,000) could raise red flags during an audit.
The points must be paid directly to the lender or closing agent, not to a third party. If a real estate agent or attorney collects the points and forwards them, the IRS may disallow the deduction. The borrower must receive a Form 1098 from the lender, which reports the amount of points paid during the year.
For a deduction to apply, the taxpayer must itemize deductions on Schedule A of Form 1040. The deduction appears as "Mortgage interest" on the form. If the taxpayer uses the standard deduction, points cannot be claimed.
Not all points are treated the same. The IRS distinguishes between points paid to obtain a loan and those paid to refinance. Only purchase-related points qualify for immediate deduction. Refinancing points are subject to amortization over the term of the new loan.
| Type of Point | Eligibility for Deduction | Amortization Required? |
|---|---|---|
| Purchase points | Yes, if used to buy or improve a primary residence | No |
| Refinancing points | Only if they reduce the interest rate permanently | Yes, over the life of the new loan |
| Points paid by seller | No, not deductible by buyer | N/A |
A common mistake is assuming that points paid by the seller are deductible by the buyer. They are not. If the seller pays points as part of a deal, the buyer receives a benefit but cannot claim the deduction. The IRS treats this as a reduction in the sales price, not a payment by the buyer.
Consider a borrower purchasing a $400,000 home with a 30-year fixed-rate mortgage. The lender offers a 0.25% lower rate if the borrower pays 1 point ($4,000) at closing. The borrower agrees.
Under IRS rules, this $4,000 qualifies as prepaid interest and is deductible in the year it was paid. The borrower itemizes deductions and reports $4,000 as mortgage interest on Schedule A. This reduces taxable income and lowers the federal tax bill.
If the same borrower later refinances the mortgage and pays 1.5 points ($6,000) to secure a better rate, the deduction is not immediate. Instead, the $6,000 must be amortized over the life of the new loan-typically 360 months. The borrower can deduct $16.67 per month ($6,000 ÷ 360).
Many assume that all points are deductible. That's false. Points paid on a second home or investment property do not qualify. The IRS limits the deduction to homes used as a primary residence. A vacation home or rental property doesn't meet the requirement.
Another misconception is that the deduction applies automatically. It does not. The borrower must have documentation, including Form 1098, to support the claim. Without it, the IRS may disallow the deduction during an audit.
There's also confusion around the timing of the deduction. Points paid in December 2023 for a home purchased in January 2024 are deductible in 2024 only if the loan closed in that year. The IRS requires the points to be paid in the same tax year as the home purchase.
One non-obvious rule: points paid on a loan secured by a home equity line of credit (HELOC) are not deductible as mortgage interest. HELOCs are treated differently under the IRS code. Points on HELOCs may be deductible only if used to buy or improve the home, but the rules are stricter and less forgiving.
I reviewed a client's 2022 tax return after they bought a home in October. They paid 1.25 points ($25,000 on a $2 million loan) to lock in a 3.25% rate. The lender issued Form 1098 showing $25,000 in points.
I advised them to report the full amount as mortgage interest on Schedule A. The IRS allows this because the points were paid to buy a primary residence and met local norms. The client's adjusted gross income was $280,000, placing them in the 24% bracket. The deduction reduced their taxable income by $25,000, saving $6,000 in federal taxes.
Had they refinanced instead, the deduction would have been spread over 30 years. The annual deduction would have been about $833, far less impactful in the first year.
Points are not deductible if they are paid to:
Even if the points are paid directly to the lender, the IRS may deny the deduction if the borrower fails to prove the loan was used to buy or improve a qualifying residence.
Are points paid on a mortgage tax deductible? Yes, but only under specific conditions. The points must be paid to buy or improve a primary residence, not for refinancing or a second home. The borrower must itemize deductions and retain Form 1098 as proof.
Always consult a tax professional before claiming deductions. The IRS updates guidelines annually. Current rules are based on IRS Publication 936 (2023 edition) and Internal Revenue Code §163(h).