Certain charges you pay to obtain your mortgage are referred to as points. There are actually two kinds of mortgage points, but only one is deductible. The first type of point is prepaid interest on the mortgage that you pay at closing; it gets you a lower rate on your mortgage, saving you on interest over the life of the loan. The real estate industry also describes some of your closing costs and fees as "points." You can only write off the first type.
You can only deduct mortgage interest if the loan is secured by your home -- and the lender has the right to foreclose if you don't pay. You can deduct interest on up to two houses if one of them is your primary home. If the second house is a rental and you never use it yourself, you have to take the interest deduction from your rental income. If your total mortgage debt is more than $1 million, you can only deduct interest on the first million.
When you buy your primary home, the IRS allows you to write off the points the year that you close. You can only take the immediate deduction if charging points is a standard real estate practice in your community -- and as long as you're taking the typical amount of points for a loan of your size. Your closing statement must clearly identify the amount of points you're paying. If you borrow from the lender to pay the points, you can't deduct the borrowed amount in that year.
If you don't qualify for an immediate deduction, you can write your points off over the life of the loan. For example, if you paid $3,000 in points and you have a 30-year loan, you can write off $100 of the points each year. If you don't need an immediate deduction, you can opt to take the long-term approach even if you qualify to take the write-off in the year you close on your mortgage.
You can only write off points -- or any mortgage interest payments -- if you itemize on Schedule A. If you take the standard deduction, you're out of luck. You can, however, claim a percentage of mortgage interest if you use a portion of your house for business -- a home office or a rental apartment, for instance. If you use, say, 10 percent of your house exclusively for business, you can deduct 10 percent of the year's interest payments and the year's share of the points.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.