With the market slowly getting better in many parts of the United States, families are looking at buying a home. For many, it means obtaining a means of financing the balance after they’ve made their down payment. Besides the financial benefits of owning property with some equity, there are some tax advantages, including deducting points on your mortgage.
Buying a Home and Points
We purchased our house 2 years ago and found a fantastic deal with a mortgage lender for a fixed 5% interest rate for 30 years. As we looked through the paperwork we examined all the numbers, including points we’d have to pay to get the mortgage.
In case you’re not familiar with the term, points (also known as loan origination fees or discount points) are basically an up-front payment from a borrower to get a specific rate from the lender. One point is equal to 1% of mortgage loan. In some cases a borrower will pay more in points to get a lower interest rate over the life of the mortgage.
If you buy a house and you plan on staying there for many, many years, then paying those points can be financially beneficial to you and your family over the life of that loan. Run the numbers to see how long it would take to break even by paying more points. If it’s longer than you intend to stay in the house, then you may be better off paying the slightly higher interest rate.
When it comes to taxes, buying a house has some great benefits. For one thing, if you itemize your deductions, you can deduct the interest paid that year for your mortgage. Another bonus is generally you can deduct the points you paid in full for your home (primary residence), provided you meet the requirements as set out by the IRS.
If you purchased a home last year you should have received a document from your lender that includes the amount of mortgage interest you paid (Box 1 ), the points you paid (Box 2), and the mortgage insurance premiums you paid, if applicable (Box 4).
When I Refinance Can I Deduct the Points Upfront?
Now, just 2 years later, we’re back looking at mortgages, this time we’re considering refinancing our home. Interest rates are even lower – we recently had quotes for 3.5% and less. Since we have equity in our home, refinancing has become a financially attractive option for us.
When it comes to filing our taxes, it’s going to be a slightly different story. Unlike a regular mortgage where you can deduct the points upfront, with refinancing, the points you paid to refinance your mortgage are deducted over the term of the new loan.
Thoughts on Deducting Points
I’d love to hear your home financing plans for 2012. How many of you are buying a house this year? How many of you are planning on refinancing you current mortgage?