By John Stylianou, Accountant
Did you refinance your mortgage this year? Or take out a mortgage for the first time? Millions of us did, attracted by the lowest rates in decades. But knowing how and when to deduct the mortgage points we paid is not quite so simple. The rules are slightly different for a first-time mortgage, a refinance, or a second refinance. Here’s a quick recap.
Mortgage points are the loan fees you pay to obtain a mortgage loan. They’re sometimes called loan origination fees or discount points. Sometimes the borrower pays for them, sometimes the seller. A key characteristic is that they’re usually expressed as a percentage of the loan amount.
When you buy a house and take out a mortgage, you can usually deduct the points as an itemized deduction on that year’s tax return.
If you refinance that mortgage, the rules are different. Points you pay for the refinance must be deducted over the life of the loan. So if you take out a 30-year loan, you deduct one thirtieth of the points each year.
There is an exception if part of the refinanced funds are spent on home improvements. You may be able to deduct the same percentage of points paid as the percentage of the loan that was used for improvements.
But if you then refinance again, you can immediately deduct any remaining points from your first refinance. And, you start deducting points from the second refinance over the life of that loan.
Keep good records so you know what’s been deducted and what has not. And call our office if you have any questions.