Definitions for "Mortgage Points"
Keywords:  irs, taxable, apr, upfront, deduct
Mortgage points are also called discount points, points, loan discount points, loan origination fees or maximum loan charges. A point is equal to 1 percent of the loan amount. For example, 1 point on a loan of $150,000 equals $1,500. Lenders consider mortgage points as interest that you pay in advance. As a result, the more points you pay when you close the loan, the lower your interest rate. If you qualify, you may be able to deduct mortgage points in the year you close the loan for tax purposes. Otherwise, you will have to amortize the points paid over the term of the loan.
Loan origination fees usually incurred when obtaining a home mortgage calculated as a percentage of the amount of the mortgage loan. If incurred in connection with a home mortgage loan for the purchase or improvement of a principal residence, and if the mortgage is secured by that principal residence, they are deductible in the year paid, subject to certain restrictions. Points paid on the refinance of a mortgage on a personal residence must be amortized over the life of the new mortgage, or until the loan is paid off.
One mortgage point equals one percent of the loan amount (e.g., $1,000 on a mortgage loan of $100,000). Mortgage points are also called discount points. The IRS considers points to be a form of prepaid interest which means they can be deducted from taxable income. Lenders often require that the borrower pay one or two points at closing in exchange for a lower mortgage rate (the lender's target APR remains the same).