The joy of homeownership for some borrowers can become a nagging frustration when the financial reality of repaying an enormous debt sets in. However, the U.S. government has implemented a number of tax advantages for homeowners that can help quell these financial fears. One of the most widely used tax deductions is the mortgage interest deduction, which often saves borrowers big money at tax time. However, it is also possible to deduct mortgage points, or "buy-down" points.
In mortgage financing, borrowers have several options for flexible financing. On some conventional loans, the mortgage rate is the mortgage rate, the closing costs are the closing costs and there is no room for negotiation. You may find this arrangement at a local bank, where the guidelines for financing are strict. However, if you use a mortgage broker or mortgage company, you may find that you can "buy down" your interest rate by paying a certain percentage of your loan amount up front.
According to the IRS, mortgage points paid in advance are tax deductible in certain circumstances. The most important factor is how you actually pay the points. At some financing centers, you can pay the points over the course of the loan, which means the buy-down points are rolled into the loan amount. However, most buy-down points are paid up-front, at closing. Only points paid in a tax year are tax deductible. Therefore, those paid up-front are generally all tax deductible, but only the points paid for that year, if points were financed, are deductible.
Before you go ahead and deduct all of your mortgage buy-down points, both your points and your loan must be eligible. Again, according to the IRS, for your points to be deductible, the value of the buy-down must be reasonable for your area, the practice of "buying down" a rate must be common in your area, the points cannot be substitutes for other closing fees, like appraisal or title, and the mortgage must be securing your primary residence.
Home Improvement Loans
The IRS also stipulates that points paid on home equity loans or home improvement loans can be deducted from your taxes. To be tax deductible, these points also must meet the criteria spelled out for first mortgage points. However, the IRS also states that if the points don't meet the required criteria for deduction in one tax year, they can be deducted, gradually, over the course of the loan.
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