question.jpgIn Federal Income Tax

What are points?

When you are taking out a loan, especially a mortgage, your lender will often charge you points, which are certain additional charges which usually increase the up-front fees you have to pay but result in a lower interest rate. Points are also sometimes referred to as discount points, a loan discount, loan origination fees or maximum loan charges. These points are generally deductible if two conditions are met. First, the points have to be paid by you in order for you to be entitled to deduct them. Second, the purpose of the points must be simply to help secure the loan. This means they cannot be fees which are directed toward getting some other service from the lender - thus, points which go towards appraisal fees, settlement fees or notary fees are not deductible.

If your payment for points is deductible, it is not usually deductible all at once - rather, that amount must be pro-rated over the life/term of the mortgage, and you can deduct that prorated amount each year. However, there are a variety of test which, if met, will allow you to deduct all points paid in a year. If you think this may apply, you should seek assistance from a tax advisor.