Are Mortgage Points Deductible?

 The tax code treats points paid in cash differently on purchase and refinance transactions.

On a purchase transaction, points paid in cash are fully deductible in the year the loan is closed. If the points are financed, they remain deductible in the first year if the cash contribution by the borrower for down payment and other costs exceeds the points. If the financed points exceed cash outlays, they are deductible as interest, not as points (see below).

On a refinance, points paid in cash are deductible but the deduction must be spread evenly over the term. If the points were $3600 and the term was 30 years, for example, the deduction is just $10 a month! However, if you pay off the loan early, all unused deductions can be taken in the year of payoff. If the loan cited above is paid off after 5 years, for example, a deduction of $3,000 could be taken in year 6. If the points are financed, they are not deductible as points.

If financed points are not deductible as points, they are deductible as interest. The loan amount will be higher, and therefore interest deductions will be greater, but these deductions are spread over the life of the loan. If the loan is repaid early, the unused deduction is lost.

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