You can deduct mortgage interest— such as home loan origination fees, maximum loan charges, and loan discounts— through the point system. One point equals 1% of your mortgage loan amount. Points you pay (and even points the seller pays) when you purchase your home are generally tax deductible in full the year you pay them. In order to get the full deduction, you must:

  • use the cash method
  • have used the mortgage to purchase or build your main home
  • have secured the mortgage loan with your main home

AND

  • point charging is an established business practice in your area
  • the deduction doesn't exceed the number of points usually charged in your area
  • you didn't borrow the funds used to pay the points
  • the settlement statement gives the amount of points paid for the closing
  • the points are a percentage of the amount of the mortgage's principle

Alternatively, you may choose to amortize the points over the term of your mortgage. This choice is usually made only when your itemized deductions are less than the standard deduction for the year you bought the home.

Points paid to refinance a loan must be deducted over the term of the loan. If you deduct points over the term of the loan and sell the home or refinance it again before the loan expires, you can deduct in the year of the sale or refinancing any points that you didn't previously deduct.