Points On A Mortgage
Mortgage points are a form of pre-paid interest to lower your overall interest rate. Each point on a mortgage is 1 percent of the loan amount. If someone borrows $250,000 at 2 points, they will pay $5,000. Below are more detailed examples of points on a mortgage.
Standard Points on a Mortgage 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 On A Mortgage 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.
Examples of Points On A Mortgage
Example 1: In 2000, Eddy Tatom got a mortgage to purchase a home. In 2014, 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 on his mortgage ($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 on a mortgage 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 2014 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 2014. He can deduct two points ($4,000) over the life of the loan. For 2014, 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 1, 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 2014. 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 2014. The total amount Eddy deducts in 2014 is $694 ($600 + $94).
Mortgage Ending Early
Frank paid $3,000 in points in 2009 that he had to spread out over the 15-year life of the mortgage. He had deducted $1,400 of these points through 2013.
In 2014, Frank prepaid his mortgage in full. He can deduct the remaining $1,600 of points in 2014.