Mortgage Points are deductible in the year they are
paid OR over the term of the loan

Definition of Points
Mortgage points, otherwise known as "loan origination fees", "loan
processing fees", "loan discount", "discount points", or "maximum
loan charges" are normally incurred when you obtain a loan at
a set interest rate.  The points increase the lender's upfront fees
but borrowers are generally charged a lower interest rate over the
loan term. 

Points also may be called loan origination fees, maximum loan
charges, loan discount, or discount points. 

Mortgage points are based on a percentage of the loan, with each
point being equal to 1% of the loan.  Thus, if you obtain a $300,000
mortgage loan, one point is $3,000.

General Rule for Deducting Points
Points are either treated as a type of prepaid interest or as a
nondeductible service fee, depending on what the charge covers. 
If the points qualify as interest, they are deductible over
the term of the loan unless they are paid on the purchase
or improvement of your principal residence, in which case
they are deductible in the year that they are paid.

Requirements
You can fully deduct points in the year paid if you meet the
following tests:

1) Your loan is secured by your main home (Your main home is the
     the one you ordinarily live in most of the time).
2) The charging of points is an established business practice in the
     geographic area in which the loan is made.
3) The points were not more than the points generally charged in
     that area. 
4)  You use the cash method of accounting.  This means you report
     income in the year you receive it and deduct expenses in the
     year you pay them.
5) The points were not paid in place of amounts that ordinarily are
     stated separately on the settlement statement, such as
     appraisal fees, inspection fees, title fees, attorney fees, and
     property taxes.
6) The funds you provided at or before closing, plus any points the
     seller paid, were at least as much as the points charged.
7) You use your loan to buy or build your main home.
8) The points were computed as a percentage of the principal
     amount of the mortgage.
9) The amount is clearly shown on the settlement statement as
     points charged for the mortgage.  The points may be shown as
     paid from either your funds or the seller's.

If you meet all of the tests above, you can choose to either fully
deduct the points in the year paid, or deduct them over the life of
the loan.

Note:  If you meet all of the tests listed above and you itemize your
deductions in the year you get the loan, you can either deduct the
full amount of points in the year paid or deduct them over the life of the
loan, beginning in the year you get the loan.  If you do not itemize
your deductions in the year you get the loan, you can spread the
points over the life of the loan and deduct the appropriate amount
in each future year, if any, when you itemize your deductions. 

Home Improvement Loan
You can fully deduct in the year paid points paid on a loan to improve
your main home if you meet the first six tests listed above. 

Second Home
If you pay points on a mortgage secured by a second home or a
vacation home, the points are not fully deductible in the year
of payment.  You can deduct these points only over the life of the
loan.

Points Paid by Seller of Property
Points paid by the seller are deductible by both the buyer and the
seller.  When the seller pays points on the sale of a principal
residence, the buyer may deduct those points as interest, but both
must subtract these points from the purchase price of the residence.

Points on a Refinanced Mortgage
Points you pay to refinance a mortgage are not deductible in full in
the year you pay them.  This is true even if the new mortgage is
secured by your principal residence.  According to the IRS, points
paid to refinance an existing home mortgage are for repaying the
taxpayer's existing "indebtedness" and they are not paid "in
connection with" the purchase or improvement of the home.
Therefore, taxpayers must deduct refinance points over the loan
period.  The IRS requires taxpayers to deduct these points monthly
over the term of the loan.  For example, if you pay points of $3,600
when refinancing a 30 year loan on your principal residence, the IRS
allows you to deduct only $10 a month, or $120 each full year.

However, if part of the refinanced mortgage proceeds were used to
improve your main home and you can meet the first 6 tests above,
you can fully deduct the part of the points related to the improvement
in the year you paid them with your own funds.  You can deduct the
rest of the points over the life of the loan.

Amounts Charged for Services
Amounts charged by the lender for specific services connected to
the loan are not interest.  Examples of these charges are:
 

Appraisal fees Notary fees Preparation costs for the mortgage note or deed of trust Mortgage insurance premiums VA funding fees

You cannot deduct these amounts as points either in the year paid
or over the life of the mortgage. 

Mortgage Ends Early
If you are deducting points on a refinanced loan and the mortgage ends
early because you prepay the loan, the lender forecloses, or you
refinance the loan again with a different lender, you can deduct the
remaining points in the year the mortgage ends.

A mortgage may end early due to a prepayment, refinancing, foreclosure,
or similar event.



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