As mortgage rates have steadily increased, mortgage points—also known as discount points—have gained significant attention among homebuyers looking for ways to manage their monthly payments. Mortgage points are a straightforward mechanism to lower the interest rate on a home loan, thereby reducing the overall monthly mortgage payment. According to the Consumer Financial Protection Bureau, the usage of mortgage points surged to over 60% among homebuyers by September 2023, nearly doubling from two years earlier. Understanding the implications of purchasing mortgage points is crucial for buyers, especially if they are cash-strapped. Although each point costs 1% of the loan amount and typically lowers the interest rate by about 0.25%, the decision to purchase points should be weighed carefully. On a $500,000 loan, for instance, paying $5,000 to reduce the interest rate from 7% to 6.75% might seem advantageous, but individual lender policies vary, influencing the actual savings.
Tax implications add another layer of complexity to the decision to buy mortgage points. Since mortgage points are essentially prepaid interest on a home loan, their costs are generally tax-deductible. Homeowners can deduct the total amount of mortgage interest paid each year, including any mortgage points, on loans up to $750,000. However, the IRS rules stipulate that the deduction for points is spread over the life of the loan, rather than that sum being written off in one year. For example, if a borrower pays $5,000 in points on a 30-year mortgage, they can only deduct approximately $166 annually, calculated by dividing the upfront payment by the total number of months in the loan term. This deduction structure may reduce the immediate financial benefits that points might seem to offer.
Eligibility for the mortgage points deduction is contingent on whether the property in question qualifies under IRS guidelines. To qualify, the property must be a primary residence or secondary home, equipped with sleeping, cooking, and toilet facilities. This definition includes a variety of property types, such as single-family homes, condos, and even houseboats. However, the rules further stipulate that if a second home is rented out, it must meet specific annual usage criteria to qualify for the deduction. Additionally, homeowners taking out home equity loans or HELOCs can deduct points, provided the funds are directed toward buying, building, or improving the home in question.
When it comes to taxes, choosing between itemizing deductions and opting for the standard deduction is significant for homeowners looking to write off mortgage points. For tax years 2024 and 2025, the standard deduction amounts—$29,200 for married couples filing jointly for 2024—are substantial enough that many might find it more favorable not to itemize. If a homeowner’s total itemized deductions, including mortgage interest and points, do not surpass the standard deduction, it may be beneficial to forgo itemizing altogether. A tax professional can offer personalized advice, which is essential for navigating the complexities of tax considerations and maximizing possible benefits as a homeowner.
In addition to mortgage points, homeowners can utilize several other tax deductions and credits. Property taxes are partially deductible—up to $10,000 annually—which adds another avenue for reducing tax burden. Home office expenses can also be claimed, provided the designated space is used specifically for business purposes. Furthermore, homeowners who invest in energy-efficient improvements or accessibility upgrades may qualify for various tax credits and deductions that can further lower taxable income. Participants in this space should always consult tax professionals to ensure they understand the specific qualifications, maximizing all potential deductions while adhering to IRS regulations.
At tax time, homeowners should expect to receive a Form 1098 from their mortgage lender that outlines the total amount paid in interest and mortgage points over the year. This information will be necessary when filling out Line 8A on tax Form 1040, Schedule A, to claim these itemized deductions. Although homeowners can deduct mortgage interest and points, it is essential to navigate tax parameters carefully, especially given the IRS rules concerning second homes and overall mortgage debt limits. For the year 2025, the standard deduction figures increase slightly, which may continue to affect decisions around itemizing deductions. For many, understanding the interplay between these tax strategies, point purchases, and the overall financial picture can mean substantial savings, making it worth the effort to seek thoughtful advice and planning moving forward.