Every homeowner knows the advantage of having a mortgage every year when April rolls around. As a homeowner you get to deduct the interest you paid the previous year on your mortgage loan.
What many homeowners don’t know is that they are eligible for another deduction if they paid points for refinancing or purchasing a new home. As a reader of this blog you know that a point is 1% of the loan amount paid at the time of closing. In exchange for paying this fee up front you get a lower interest rate. Take a close look at the 1098 you got from your mortgage lender. If you paid points last year they should be itemized on this document.
The 1098 you receive each year shows the amount of mortgage interest you paid the previous year. If you prepare your own tax return the interest paid and points go into line 10 of your Schedule A. If you paid points and they are not on your 1098 but you have them on your closing paperwork, the amount goes on line 12 of your Schedule A. Don’t overlook this deduction, it could save you money.
If last year was the first year of your mortgage pay close attention to points that were paid. The seller will often pay part or sometimes all of the points for you. Guess what? If the seller paid all the points, the buyer still gets to claim the deduction. Whether or not you get to deduct all of what you paid in points depends on the following factors.
The points must have been paid on your primary residence, where you live for most of the year. You must report the points in the year they were paid and claim the deduction for that year. You must be able to document on your settlement papers that the points were paid on the mortgage.
Points that are paid on an investment property or vacation home cannot be fully deducted the year you took out your mortgage.
Points paid when refinancing a mortgage may also be tax deductible. If the proceeds from the refinance are used for home improvements they may be fully tax deductible. If you used the money for other reasons such as purchasing a car, you must take the deduction over the term of your new loan.
To calculate the amount of deduction you are eligible for, divide the points you paid by the number of payments you will make over the loan?s term. Your lender will also be able to provide this information to you.
To learn more about maximizing the tax deduction for your mortgage interest payments, sign up for our free guide to mortgages and mortgage refinancing.