Are mortgage points tax deductible? Sometimes — here are the rules.

Core Insights - Mortgage rates have decreased from their peak, but many borrowers still find them unfavorable. Buying mortgage points can help reduce monthly costs by paying an upfront fee for a lower interest rate [1][2] Group 1: Mortgage Points Overview - Mortgage points, also known as discount points, are used to lower mortgage rates by paying an upfront fee at closing, effectively prepaying interest on the loan [2][3] - Each point costs 1% of the loan amount and typically lowers the interest rate by approximately 0.25%. For example, on a $500,000 loan, paying $5,000 can reduce the rate from 6% to 5.75% [3] Group 2: Tax Deduction for Mortgage Points - Mortgage points are tax-deductible as they are considered prepaid mortgage interest, subject to certain limits [4][5] - The IRS allows homeowners to write off mortgage interest, including points, up to $750,000 in total mortgage debt, with a higher limit for mortgages taken out before December 16, 2017 [5][13] - Deductions for points must be spread over the loan term rather than taken as a one-time write-off. For instance, a $5,000 payment for points on a 30-year loan results in an annual deduction of about $166 [6] Group 3: Eligibility and Requirements - To qualify for the mortgage points tax deduction, the property must be a "qualified home," which includes primary residences and second homes with necessary facilities [7] - If a second home is rented out, specific annual usage thresholds must be met to qualify for the deduction [8] - Home equity loans and HELOCs can also qualify for point deductions if the funds are used to buy, build, or substantially improve the home [9] Group 4: Itemizing Deductions - Homeowners must itemize their tax returns to deduct mortgage points, as opposed to taking the standard deduction [10][12] - Other deductible expenses for homeowners include property taxes (up to $10,000 annually) and home office costs, provided the office is used specifically for business [10]