Detailed Examples of Home Mortgage Points

Standard Points Example
Ken Parker took out a $200,000 mortgage loan to purchase his
home in December and was charged 1 point ($2,000).  He meets
all the tests for deducting points in the year paid, except the only
funds he provided were a $1,500 down payment.  Of the $2,000
charged for points, Ken may deduct $1,500 in the year paid.  He
must spread the remaining $500 over the life of the mortgage.

Points Paid By Seller
Joseph Jones sells Jeffrey Huckabee his principal residence for
$145,000 and also agrees to pay two of the four points on Jeffrey's
new $100,000 mortgage ($2,000).  Joseph must decrease his net
sales price to $143,000 (which will decrease his gain by $2,000).
Jeffrey's purchase price is $143,000 and he gets to deduct all
$4,000 of the mortgage points.

Complex Points Example
In 1997, Eddy Tatom got a mortgage to purchase a home.  In 2007,
Eddy refinanced that mortgage with a 15-year $200,000 mortgage
loan.  The mortgage is secured by his home.  To get the new loan,
he had to pay three points ($6,000).  Two points ($4,000) were for
prepaid interest, and one point ($2,000) was charged for services,
in place of amounts that ordinarily are stated separately on the
settlement statement.  Eddy paid the points out of his private funds
rather than out of the proceeds for the new loan.  The payment of
points is an established practice in the area, and the points
charged are not more than the amount generally charged there. 
Eddy's first payment on the new loan was due August 1.  He made
five payments on the loan in 2007 and is a cash basis taxpayer. 

Eddy used the funds from the new mortgage to repay his existing
mortgage.  Although the new mortgage loan was for Eddy's
continued ownership of his main home, it was not for the purchase
or improvement of that home.  Thus, Eddy cannot deduct all of the
points in 2007.  He can deduct two points ($4,000) over the life of the
loan.  For 2007, Eddy can deduct  $111.  This is determined as
follows, [($4,000 / 180 months) x 5 payments].  The other point
($2,000) was a fee for services and is not deductible. 

Example 2:
The facts are the same as in Example 3, except that Eddy used
$30,000 of the loan to improve his home and $170,000 to repay his
existing mortgage.  Eddy deducts 15% ($30,000 / $200,000) of the
points ($4,000) in 2007.  His deduction is $600 ($4,000 x 15%).

Eddy also deduct the proportional part of the remaining $3,400
($4,000 - $600) that must be spread over the life of the loan.  This is
$94 [($3,400 / 180 months) x 5 payments] in 2007.  The total amount
Eddy deducts in 2006 is $694 ($600 + $94).

Mortgage Ending Early
Frank paid $3,000 in points in 1997 that he had to spread out over the
15-year life of the mortgage.  He had deducted $2,000 of these points
through 2006. 

In 2007, Frank prepaid his mortgage in full.  He can deduct the remaining
$1,000 of points in 2007.



Click here to leave points examples and return to points
main