Buying or refinancing a home is expensive: In 2012, a $200,000 mortgage transaction cost $3,754 on average to close. Most buyers need a mortgage to buy a home, and refinancing involves many of the same fees as buying, including escrow, title and loan fees. At tax time, borrowers can save on some of these fees. The settlement statement of closing costs is an important tool in figuring out, and claiming, the deductions.
The Department of Housing and Urban Development (HUD) requires that real-estate transactions involving mortgages disclose all closing costs on a standard HUD-1 Settlement Statement. It lists fees by category and divides buyer and seller costs and credits in a purchase transaction. Borrowers can deduct points, mortgage interest and real-estate taxes paid at settlement. They must itemize the deductions on Form 1040, Schedule A. Itemizing is not always the optimal deduction method, though; in some cases, the standard deduction is greater than the total of itemized expenses, Bankrate says.
The cost to acquire a loan is expressed as points; one point is 1 percent of the loan amount. For example, a $200,000 loan cost two points, or $4,000. Points include an origination fee payable to the lender that directly funded the loan, or the mortgage broker that helped the borrower get the loan from a mortgage lender. Points also include discount points, which the borrower can pay to lower his interest rate; and premiums, which increase the interest rate but provide the borrower with a credit to use toward closing costs. Points are listed in Section 800 of the HUD-1.
Borrowers pay mortgage interest at closing to cover the remainder of the month in which they purchase. For example, the loan's first payment is due in March for a January closing. The borrower pays through the month of January if he closes on any day other than the last day of the month; therefore, a closing on the 15th requires 16 days of prepaid interest. The borrower may deduct this cost, found in section 900 of the HUD-1, in addition to mortgage interest paid throughout the same year.
As a homeowner, the borrower can deduct the real-estate taxes he pays semi-annually or annually to his local tax authority. At closing, the borrower pays a portion of the taxes due for the year. In their purchase transaction, the buyer and seller can deduct their own share of taxes for the time period in which the home was owned. For example, a seller who prepaid his taxes past the closing date can only deduct the amount for the time he owned the home, or up to the sale date. The buyer can deduct the amount paid on or after the closing date. The buyer must reimburse the seller at closing for the amount he prepaid.
K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.