Maximizing Tax Benefits with Mortgage Discount Points-Edueasify
Maximizing Tax Benefits with Mortgage Discount Points-Edueasify

Mortgage Discount Points: Are you keen on optimizing your tax savings while realizing your dream of homeownership? Let’s explore a lesser-known deduction available for homeowners: Mortgage Discount Points.

What are Mortgage Discount Points?

Mortgage Discount Points entail paying an upfront sum to receive points, which results in a reduction in the interest rate on your home loan.

Mortgage discount points are a form of prepaid interest that a borrower can choose to pay upfront at the time of closing on a mortgage loan.

Each point typically costs 1% of the total loan amount and can lower the interest rate on the mortgage by a certain amount, usually 0.25% per point, although this can vary depending on the lender and the terms of the loan.

Check: Comparing Today’s Mortgage Rates: Find Your Best Deal Now!

Homebuyer’s Secret Weapon: Slash Rates & Taxes with Mortgage Discount Points

How Does it Work?

You’re taking out a $100,000 loan for 20 years with a 5.5% interest rate. Your lender offers you the option to purchase 2 mortgage points at $1500 each. By doing so, your mortgage interest rate decreases by 0.75%.

Illustrative Example:

ScenarioWithout PointsWith Points
Loan Amount$100,000$100,000
Interest Rate5.5%4.75%
Total Cost$165,094$158,093
Points Paid$0$3,000

Without purchasing points, the total cost over 20 years amounts to $165,094. However, with mortgage points, the total cost becomes $158,093 (plus $3000 upfront for points), resulting in a saving of $7001 (excluding the time value).

Read: Maximizing Your Energy Efficient Home Improvement Credit: The Power of Product Identification Numbers (PINs), 13 Essential Additional Expenses When Buying a Home

Tax Benefits: Deducting Mortgage Discount Points on Your Taxes

Tax Benefits Deducting Mortgage Discount Points on Your Taxes
Tax Benefits Deducting Mortgage Discount Points on Your Taxes

According to the IRS, the upfront payment for points is considered a prepayment of interest. Hence, taxpayers can claim a deduction for this amount on their Schedule A of Form 1040, provided the property is their principal residence.

In conclusion, by strategically utilizing Mortgage Discount Points, homeowners can secure a more favorable interest rate and maximize their tax deductions, leading to substantial long-term savings.

See: Commercial Mortgage Investing: A Guide for Beginners

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