Are Mortgage Points Deductible?

January 21, 2003, Revised October 13, 2003 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.  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.  Points that are financed, meaning that they are included in the loan, are treated in the same way on purchases and refinances.  In neither case are they deductible as points.  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, much of the deduction derived from the points is lost. Copyright Jack Guttentag 2003

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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