Thursday, April 06, 2006

Buying Points: Prepaid Interest is Tax Deductible

The points we paid on our mortgage loan last year cost $3200. Paying the same points now would cost $10,000!

When you buy a home, you might pay points (discount points) to the lender to lower the overall interest rate on the mortgage. Since these points are considered pre-payment of the interest on your mortgage, they are tax-deductible: since a home loan typically includes 1 to 3 points, this can add up to a sizeable tax deduction. It helped us a lot on our taxes this year.

However, when deciding whether or not to pay points a loan, you'll need to calculate the "break even" point during the life of the loan. As a general rule of thumb, the longer you own the property and the loan, the greater the benefit of paying points up-front.

We were also able to deduct some of our closing costs. Closing costs can add up to a chunk of change: title insurance, escrow, attorney fees, processing fees, every one seems to get a cut. They include all kinds of costs for processing your loan and transferring property ownership. Check the closing statement carefully and question any and all line items: for example why and what are the courier fees if the documents were transferred electronically?

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