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Loan Points Explained

Definition
Loan points are a charge to the borrower in connection with obtaining a real estate loan. In theory, the more loan points paid up front, the lower the interest will be over the life of the loan. The term "points" is short for "percentage points". If you are charged 1 point, it equates to 1% of the loan amount. Fox example, on a $150,000 loan, 1 point = 1% of $150,000, or $1,500.

Differences
Mortgage providers charge discount and/or origination points, depending on their method of doing business, whether it be through a retail or wholesale operation.

Brokers charge origination points - (brokers do not charge discount points). Sometimes the broker's origination points are zero.

The words "points" can be interpreted different ways: origination points, discount points, or a combination of both. The important issue to the consumer is not the term, but the bottom-line amount, in dollars. 3 origination points and 1 discount point is the same as 4 origination points and zero discount points.

Tax Deductability - Home Purchase
If you purchased a home, your loan points (both origination points and discount points) are deductible in the year the home was purchased.

By January 31st of the year following the year you purchased your home, you will receive a Mortgage Interest Statement Form 1098 from your lender. The statement will show the total interest paid on your mortgage during the year. It will also show the deductible points you paid during the year.

The interest you paid at settlement - including origination and discount points - should be included on the statement. If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Put the total on line 10 of Schedule A (Form 1040) and attach a statement to your return explaining the difference. Write "See attached" next to line 10.

For further guidance on this issue, see Publication 530.

Tax Deductability - Home Refinance
Points paid in connection with a refinance generally are not deductible in the year paid, but instead must be spread out over the life of the loan. However, if you pay off your mortgage, sell your home, or refinance your home, you may deduct the remainder of the loan points in that year.

For information on home mortgage interest, and limitation on deductability, see Publication 936


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