Points

• The term “points” describes up-front payments made to the lender to obtain a loan. Points may be described as loan origination fees, loan discount fees, or maximum loan charges. Points act to reduce the lender’s risk, allowing the lender to offer slightly lower interest rates. You can fully deduct points in the year paid if you meet certain tests. Otherwise, you must deduct the points in yearly installments over the life of the loan. Points charged on second mortgages or mortgage refinancing must be deducted over the life of the loan. If you pay off your mortgage early, you can deduct all remaining unamortized points in the year you paid off the mortgage. But if you refinance with the same lender the points balance continues to be amortized.
  
  

Deduction Tests

• Your points are fully deductible in the year paid if your mortgage is used to build or buy your main home and is secured by that home. Your points must be computed as a percentage of the loan amount and must be in line with points generally charged in your area. Your down payment must equal or exceed the points charged. Your points can’t be in lieu of settlement charges and must clearly be shown as points on your mortgage settlement statement. If you can’t pass all these tests, you have to deduct points over the mortgage term.
  
  

Mortgage Insurance

• You can deduct the premiums the lender requires you to pay for mortgage insurance. If paid annually, you deduct each payment in the year paid. If you pay the entire cost of the mortgage insurance up front, you must allocate the premium over the shorter of the life of the mortgage or 84 months. If you pay off the mortgage early, you don’t get to deduct the unamortized premium.
  
  

Other Mortgage Deductions

• Other mortgage-related payments deductible as interest include two types of penalty charges. You can deduct late-payment charges as a penalty. If you are assessed a prepayment penalty for paying off your mortgage early, you can deduct that penalty as interest. Meanwhile, if you sell your home, you can deduct mortgage interest and related payments up through the day before the closing date. If you receive a mortgage interest credit certificate from a state or local government agency, you take the credit amount as a direct credit against your tax bill and reduce your interest deduction by the credit amount. If you are a minister or member of the military who receives a nontaxable housing allowance, you can still deduct mortgage interest you paid.