When you close on your mortgage loan, you will often pay points. One point equals 1 percent of the loan amount. Points are also called mortgage points, loan origination fees, or discount points.
Mortgage lenders are often willing to lower your mortgage loan interest rate in exchange for you paying points. Ask your lender how much it is willing to cut your rate in exchange for paying 1 point. It may or may not be a smart financial decision. Your taxes and the number of years you remain in the home also determine if paying points at closing in exchange for a lower rate is a better deal than paying zero points at the higher interest rate.
The IRS considers points to be a form of prepaid interest. This means that they can be deducted from your taxable income, as long as you itemize your mortgage interest expense using Schedule A of IRS Form 1040.
The IRS generally requires that you deduct points over the term of the mortgage loan, unless you meet certain requirements. For information on deducting the full amount of points in the year paid, see IRS Pub. 936 : "Home Mortgage Interest Deduction." For information on deducting points over the term of the loan, see chapter five of IRS Pub. 535 : "Business Expenses."
