Yes – you can deduct mortgage points as long as you meet certain IRS rules.
These points are essentially prepaid interest, which qualifies for the mortgage interest deduction on your tax return if you itemize. The deduction can potentially save you thousands in the tax year you purchase or refinance a home, but there are important conditions and exceptions to understand.
According to a 2024 Consumer Financial Protection Bureau analysis, the share of homebuyers paying mortgage points roughly doubled from 2021 to 2023 as interest rates rose.
🏠Instant tax savings: Discover how to deduct mortgage points and get money back at tax time.
⏳ Refi rules unraveled: Learn why refinancing rules require spreading out points (and how to handle it).
⚖️ Law & loopholes: Understand IRS regulations, Tax Cuts and Jobs Act changes, and legal rulings on deducting points.
💡 Pro tips & pitfalls: Avoid common mistakes (like not itemizing) that can nullify your deduction.
📊 Real examples: See three scenarios (buying, refinancing, rental) with tables, plus FAQs answering popular questions.
When you pay points on a mortgage, you’re paying interest upfront to lower your loan’s interest rate. The IRS treats points as prepaid interest, which means they are generally tax-deductible. In fact, Form 1098 (the mortgage interest statement sent by your lender or mortgage servicer) will typically report any deductible points you paid during the year. However, you must itemize deductions on Schedule A to claim this, and specific conditions determine when you can deduct the points.
For a home purchase or home construction loan on your qualified residence (usually your primary home), the IRS lets you deduct the points in the year you paid them – essentially giving you an upfront tax break. There’s a catch: you must meet all the IRS criteria for immediate deduction. Those rules include:
- Primary residence: The loan must be secured by your main home (the one you live in most of the year).
- Purchase or improvement: You used the loan to buy, build, or improve your primary home (not for vacations or investments).
- Common practice: Paying points is an established custom in your area and not excessively high (typical amounts).
- Cash at closing: You paid the points out-of-pocket (for example, via down payment or closing cash – not financed into the loan balance).
- Percentage-based: The points were calculated as a percentage of the loan principal (for example, 1 point = 1% of loan amount).
- Listed on settlement: The points are clearly itemized on the closing disclosure or HUD-1 settlement statement as “points.”
If all these conditions are met, congratulations – you can write off the entire cost of the points on your current year’s taxes. This is a big win for new homebuyers; a hefty points payment can generate a large deduction. (It’s one way the tax code rewards owner-occupied homes and encourages homeownership.) For example, if you paid $5,000 in points on a $250,000 mortgage, you could deduct that whole $5,000 and potentially reduce your federal tax bill by over $1,000 (depending on your tax bracket).
What if you don’t meet all the tests? Don’t worry – points are still deductible, but you’ll have to use points amortization. In plain English, that means spreading the deduction over the life of the loan. So, if you can’t deduct the points all at once, you divide the points by the number of payments (months) in your loan term, and deduct that portion each year. (We’ll show an example of this shortly.)
This situation typically happens if:
- The mortgage is a refinance or second home loan (not your first mortgage on a primary home).
- You borrowed the money for points (for instance, the lender rolled the points into the loan).
- The points were for a rental or investment property (different tax treatment, as we’ll cover).
- Or simply, you chose to spread out the deduction by not claiming it all at once (IRS allows this as an option if you qualify for immediate deduction).
Federal vs. State Tax Treatment of Mortgage Points
It’s important to note that these rules apply to your federal income taxes. States may handle mortgage interest and points differently:
| Federal IRS Rules | State Tax Nuances |
|---|---|
| Federal law allows you to deduct points as mortgage interest if you meet the qualifications. You can deduct points on loans up to the federal mortgage interest limit ($750,000 of acquisition debt for loans after 2017; $1 million for older loans). | Most states conform to the federal definition of deductible mortgage interest. If your state income tax lets you itemize, you can typically deduct points on your state return as well. Some states that haven’t adopted the federal $750k loan limit may still allow interest (and points) on up to $1 million of mortgage debt. |
| You must itemize on your federal return to claim a deduction for points. The large federal standard deduction (doubled under the Tax Cuts and Jobs Act) means fewer people itemize, so many homeowners get no tax benefit from paying points. | State tax rules vary. A few states let you itemize deductions on the state return even if you took the standard deduction federally. Others require that you itemize federally in order to itemize for state taxes. States with no income tax (e.g. Texas, Florida) have no state tax deduction at all – your mortgage points only provide a federal tax benefit in these states. |
In summary, for federal taxes you can absolutely deduct qualifying points, and most states follow suit. Keep in mind that state tax rules can change, so check your state’s guidelines or consult a tax professional if you’re unsure about a particular state deduction nuance. Next, let’s look at some common pitfalls to avoid when taking this deduction.
What to Avoid When Deducting Mortgage Points
Even if mortgage points are deductible, there are several mistakes and misconceptions that can trip you up. Avoid these pitfalls to ensure you get the full tax benefit:
- Not itemizing your deductions: If you take the standard deduction, you can’t claim any mortgage interest or points. Make sure your total itemized deductions (mortgage interest, property taxes, etc.) exceed your standard deduction; otherwise, your points won’t provide a tax advantage.
- Deducting refinance points all at once: You generally cannot deduct points from a mortgage refinance in the year you pay them (except any portion used for home improvements). Refinance points must be deducted gradually over the loan’s term. Trying to write off all refinance points immediately is a big no-no – the IRS will expect you to amortize them.
- Mislabeling other fees as “points”: Only true discount points or origination points (a percentage of the loan amount paid as prepaid interest) are deductible. Many closing costs – appraisal fees, title insurance, inspection fees, attorney fees, etc. – are not tax-deductible. (For example, a “point” fee that is actually for underwriting or appraisal services is not deductible interest.) Don’t mistakenly try to deduct those other charges as if they were interest.
- Ignoring basis adjustment for seller-paid points: If the home seller paid points on your behalf (common in some purchase deals), you as the buyer get to deduct those points. However, you must reduce your home’s cost basis by the amount of seller-paid points. (And note: the seller cannot deduct points they paid for the buyer – instead, the seller treats it as a selling expense on their end.)
- Mixing up personal vs. rental property rules: Points on a rental or investment property are not deducted on Schedule A. Instead, they are a business expense for the property. You generally have to amortize rental points over the life of the loan and deduct them on the Schedule E for your rental income. Claiming rental property points as personal itemized deductions is incorrect and can lead to disallowed deductions.
By steering clear of these mistakes, you’ll protect your deduction and stay on the right side of the tax rules.
Real-Life Examples: Deducting Points in Different Scenarios
Let’s bring this to life with three scenarios that show how point deductions work in practice. These examples cover a first-time home purchase, a refinance, and an investment property – illustrating the differences in deductibility.
Scenario 1: First-Time Homebuyer (Immediate Deduction)
Jane is buying her first house. The home costs $300,000, and she takes out a $240,000 mortgage. Her lender offers a lower interest rate if she pays 2 points upfront. Jane pays $4,800 in points (2% of $240k) out-of-pocket at closing.
Jane meets all the IRS criteria for an upfront deduction: it’s a loan on her primary, owner-occupied home, the points are customary for her area, and she paid them in cash at closing. She plans to itemize her deductions since her mortgage interest plus other deductions exceed the standard deduction.
Result: Jane can deduct the entire $4,800 in points on her 2025 tax return as part of her mortgage interest deduction. This boosts her itemized deductions significantly. If she’s in the 22% tax bracket, that $4,800 deduction saves her about $1,056 in federal tax.
| Points Paid | Deductible in 2025 | Deductible in Future Years |
|---|---|---|
| $4,800 | $4,800 (100% in year paid) | $0 (fully deducted upfront) |
Explanation: Jane gets the full benefit in Year 1. She essentially treated the points as additional interest paid in 2025, so she won’t have any points left to deduct in later years.
Scenario 2: Refinancing Your Mortgage (Points Amortized)
Mike bought a home a few years ago and is now refinancing his mortgage to get a better interest rate. He has a $200,000 remaining loan balance. The bank charges him 1.5 points on the new loan (adding up to $3,000 in points) to secure a lower rate. Mike pays the $3,000 at closing.
Because this is a refinance on Mike’s primary home (not a purchase), IRS rules say he cannot deduct the full $3,000 in the year paid. Instead, Mike must amortize these points over the life of his new loan. His new mortgage is a 30-year (360-month) loan, so he can deduct 1/360th of the points per month. That works out to about $8.33 per month, or $100 per year.
Mike will include $100 of these points in his itemized deductions each year for 30 years. It’s a slow, steady benefit rather than a big one-time write-off.
| Points Paid | Deductible in 2025 | Deductible in Future Years |
|---|---|---|
| $3,000 (refinance) | $100 (first-year amortized amount) | ~$100 each year, for years 2026–2054 (spread over 30 years) |
What if Mike sells the house or refinances again before 30 years? If he pays off the loan early (or refinances with a different lender), the IRS lets him deduct all the remaining un-deducted points in that payoff year. (For example, if Mike refinances again in 2030 with a new bank, he can take a deduction at that time for all the points from the 2025 refi that he hasn’t deducted yet.) Important: If Mike refinances again with the same lender, he cannot immediately deduct the remaining points from the first refinance – he would have to continue amortizing them over the new loan’s term.
Scenario 3: Rental Property Purchase (Investment Property Loan)
Lisa buys an investment property (a rental house) for $200,000. She takes a $150,000 mortgage on the property. To get a better rate on this investment loan, she pays 1 point ($1,500).
For tax purposes, this loan is for a non-owner-occupied investment property. That means it’s not a “qualified residence” for personal tax deductions. Instead of using Schedule A, Lisa will treat the points as a rental business expense on her Schedule E (which reports her rental income and expenses). However, just like Mike’s refinance, she can’t deduct it all at once – it has to be amortized over the life of the loan.
Lisa’s mortgage is a 30-year loan, so she’ll deduct the $1,500 over 30 years. That comes out to $50 per year as an interest expense on her Schedule E.
| Points Paid | Deductible in 2025 | Deductible in Future Years |
|---|---|---|
| $1,500 (rental loan) | $50 as rental expense (Year 1) | $50 each year for the loan’s term (30 years) |
If Lisa sells the rental property or pays off the loan early, any remaining undeducted points would generally be deductible that year as a final expense for the rental. (This parallels the rule for personal residences – you get to deduct leftover points when a loan ends, except when refinancing with the same lender as noted above.)
These scenarios show how the timing of your deduction for points depends on the situation. A first-time buyer in an owner-occupied home gets an upfront write-off, while refinancers and rental owners get their tax break spread over time.
IRS Tax Law and Court Rulings on Mortgage Points
Mortgage point deductions aren’t just a casual idea – they’re grounded in tax law. Under Internal Revenue Code §163(h), home mortgage interest is deductible (with limitations), and the IRS explicitly classifies points as interest. In other words, the law backs you up: points paid on a qualified mortgage are a legitimate tax deduction.
The IRS provides official guidance in publications like IRS Publication 936 (Home Mortgage Interest Deduction), which includes worksheets and flowcharts to determine if your points are fully deductible in the current year or must be amortized. The rules we’ve discussed (such as deducting points on a primary home purchase immediately, or spreading out refinance points) come straight from these IRS guidelines and the tax code.
The Tax Cuts and Jobs Act (TCJA) of 2017 slightly changed the landscape. This law:
- Increased the standard deduction – which means fewer people itemize now. As a result, some homeowners who used to deduct interest (including points) no longer benefit because they take the larger standard deduction instead.
- Lowered the mortgage debt limit – Under TCJA, you can only deduct interest (and points) on up to $750,000 of new acquisition debt (for mortgages originated after Dec 15, 2017). Previously, the limit was $1 million. (Loans that were grandfathered in keep the old limit.) This means if you have a very large mortgage, a portion of your points might not be deductible because it’s interest on debt above the allowable limit. The TCJA changes are in effect until 2025, after which the limit is set to revert to $1 million unless new legislation is passed.
It’s critical to comply with the IRS rules when deducting points. Tax courts have upheld IRS decisions to deny deductions when taxpayers didn’t follow the rules. For example, if you can’t substantiate that you actually paid the points (with records like a HUD-1 closing statement or settlement sheet), the IRS can disallow the deduction. In one Tax Court case, a homeowner’s large mortgage interest deduction was thrown out because he couldn’t prove he paid the amounts claimed – a costly lesson to keep your documents in order.
Courts have also enforced the timing rules strictly. If someone tries to deduct refinance points in a single year or claims points on an investment property on Schedule A, those deductions get rejected because they violate the regulations. The bottom line from legal precedent: follow the IRS criteria to the letter. As long as you do, both the IRS and the courts will recognize your mortgage points deduction.
To be safe, maintain good records:
- Save your Form 1098 from the lender, which shows points and interest paid.
- Keep copies of your closing disclosure or settlement statements that itemize any points paid.
- Note how you paid the points (from your own funds or seller-paid, etc.), in case you need to demonstrate you met the requirements (like the cash-at-closing rule).
By having documentation and adhering to the guidelines, you’ll have solid legal evidence to back up your deduction. And remember, the tax law is on your side when you meet the qualifications – the tax code views mortgage points as a form of interest, fully supported as a deduction for those who qualify.
(Side note: Agencies like Fannie Mae and Freddie Mac – which influence mortgage lending practices – have no effect on tax deductibility. They may affect how loans are priced (and thus how points are used in getting a loan), but whether points are deductible is solely determined by tax law and IRS rules.)
Key Terms and Concepts Explained
Mortgage points (discount points): A one-time upfront fee paid to the lender to “buy down” your interest rate. Points are essentially prepaid interest on the loan – typically, 1 point equals 1% of the loan amount.
Prepaid interest: Interest paid in advance. Mortgage points are considered prepaid interest, which is why they can be deducted as home mortgage interest (either immediately or over time, depending on the situation).
Mortgage interest deduction: The tax deduction that homeowners can claim for interest paid on a home loan for a qualified residence. You must itemize deductions on Schedule A to use it. This deduction includes interest from regular payments and any points you paid, up to certain loan limits.
Form 1098 (Mortgage Interest Statement): A form sent by your lender or mortgage servicer (and filed with the IRS) after year-end. It reports the mortgage interest you paid during the year. If you paid points on a home purchase, those points should be listed on Form 1098 as well (in the box for points paid on purchase of a principal residence).
Schedule A: The IRS form for itemized deductions (part of Form 1040). This is where you claim mortgage interest and points, along with other itemized expenses like property taxes, charitable donations, and state taxes. If your total itemized deductions on Schedule A are greater than your standard deduction, itemizing lowers your taxable income.
Qualified residence: In tax terms, this generally means your main home and one other home (for example, a second home or vacation home that you personally use). Mortgage interest (and points) on a qualified residence is eligible for deduction. A rental property that you don’t use personally is not a qualified residence for the purpose of the personal mortgage interest deduction.
Owner-occupied home: A home you live in as an owner (as opposed to renting it out to someone else). Only owner-occupied homes count toward the mortgage interest deduction on Schedule A. (You can deduct interest on your primary home and one additional owner-occupied home.) If you have a mortgage on a property you rent out, that’s treated differently – it’s a business expense, not a personal itemized deduction.
Refinancing rules: The special IRS guidelines for deducting points when you refinance an existing mortgage. In short, points paid on a refinance of your home are usually not deducted all at once; instead, you deduct them over the loan’s life. An exception is if part of the refinance money is used to substantially improve your main home – the points related to the improvement portion can be deducted immediately (provided you meet the other criteria like paying the points out of pocket).
Points amortization: The process of spreading out a points deduction over time. When you can’t deduct the full amount of points in the year paid, you amortize the points by deducting a pro-rated portion each year. For example, amortizing $3,000 in points over a 15-year loan lets you deduct $200 per year for 15 years (until the points are fully deducted).
Residential vs. investment properties: For tax purposes, there’s a big difference. Interest and points on loans for personal residential use (your homes) are deductible on Schedule A if you itemize. In contrast, interest and points on loans for rental or investment properties are deductible against rental income as a business expense on Schedule E. (And just like with a refinance, points on a rental mortgage must be amortized over the life of the loan – you can’t deduct them all at once in the year of purchase.)
First-time homebuyer credit: A special tax credit that was offered in the past (most notably in 2008–2010) to encourage homeownership. It provided a direct tax credit to new homebuyers. This credit is not the same as a mortgage interest or points deduction. (A credit directly reduces your tax due dollar-for-dollar, whereas a deduction reduces your taxable income.) The first-time homebuyer credit has expired on the federal level, so today’s first-time buyers mainly benefit from deductions like mortgage interest/points and property taxes rather than any upfront buyer credit.
Tax Cuts and Jobs Act (TCJA): The major tax law passed in late 2017 that, among other changes, significantly raised the standard deduction and capped the state and local tax deduction. TCJA also lowered the cap on mortgage debt for the interest deduction from $1,000,000 to $750,000 on new loans. This law means fewer taxpayers itemize (since 2018), and it limits how much mortgage interest (including points) high-value homebuyers can deduct. Unless extended or changed, many TCJA provisions expire after 2025.
Home Mortgage Disclosure Act (HMDA): A federal law that requires lenders to report detailed data on mortgage loans (to monitor lending practices). HMDA data doesn’t affect your taxes, but it reveals trends such as how commonly borrowers pay points. (For instance, HMDA statistics showed that the percentage of buyers paying discount points roughly doubled between 2021 and 2023.) This context highlights that many people are paying points – and those who do should be aware of the potential tax deduction.
Fannie Mae and Freddie Mac: Government-sponsored enterprises that purchase mortgages from lenders. They set many of the standards for conventional loans (including how loans are priced and what fees, like points, might be offered to borrowers). These entities influence mortgage terms and interest rates, which can affect how often borrowers decide to pay points. However, Fannie Mae and Freddie Mac do not influence tax law – whether your points are deductible is determined by the IRS rules, not by these financial institutions.
FAQs: Mortgage Points and Tax Deductions
Can I deduct points on a refinance?
Yes. You can deduct mortgage points on a refinance, but not all at once. Refinancing points must be deducted over the loan’s term (you generally cannot deduct them entirely in the year paid).
Can I deduct mortgage points if I take the standard deduction?
No. If you claim the standard deduction, you cannot also itemize, and therefore you can’t deduct mortgage interest or points. You only get a tax break for points by itemizing on Schedule A.
Are points on a second home deductible?
No – not in the year you pay them. Points on a second home must be deducted over the life of the loan (you can’t deduct them all upfront).
Can I deduct points on a rental or investment property?
Yes, but not on your personal tax return’s itemized deductions. Points on a rental property loan are deducted as a business expense (amortized over the loan term) on Schedule E, not on Schedule A.
My Form 1098 doesn’t show any points – can I still deduct them?
Yes. Sometimes lenders don’t report points on Form 1098. You can still deduct the points if you have your closing statement or other records showing you paid them and you meet the IRS requirements.
Are other mortgage closing costs tax-deductible like points?
No. Most closing costs (e.g. appraisal, title, legal fees, inspections) are not tax-deductible. Only mortgage interest (including points) and property taxes (and sometimes mortgage insurance premiums) are deductible – not those other fees.