Points There are many costs associated with obtaining a mortgage on a home. "Points," also called, loan discount or discount points, describe costs which are a form of prepaid interest. Each mortgage discount point paid lowers the interest rate on your monthly mortgage payments. In general, points to obtain a new mortgage, to refinance an existing mortgage, or paid on loans secured by your second home are deducted ratably over the term of the loan. Deductible points If you itemize deductions on Schedule A (Form 1040), Itemized Deductions, points which meet certain criteria may be deductible as home mortgage interest. Topic no. 505 and Can I deduct my mortgage-related expenses? provide more information on deducting mortgage interest and points. You can deduct the points to obtain a mortgage or to refinance your mortgage to pay for home improvements on your principal residence, in the year you pay them, if you use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. The points relate to a mortgage to buy, build, or improve your principal residence (the home you live in most of the time). Your principal residence secures your mortgage. Paying points is an established business practice in the area where the loan was made. The points paid weren't more than the amount generally charged in that area. You provide funds, at or before closing, at least equal to the points charged. You can't use funds borrowed from your lender or mortgage broker to pay the points. However, amounts the seller pays for points on your loan is treated as paid directly by you from unborrowed funds, provided you subtract the amount of the seller-paid points from your basis (purchase price) in your home. The points were computed as a percentage of the principal amount of the mortgage, and The amount shows clearly as points on your settlement statement. Nondeductible costs to obtain a mortgage The following amounts are not deductible as interest: Costs to prepare a mortgage note. Appraisal fees. Notary fees. Additional points the lender charges in lieu of other costs such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. In addition, a seller cannot deduct the points the seller paid for your loan. However, these points are a selling expense which reduce the seller's gain on the sale. For more information on points, refer to Publication 936, Home Mortgage Interest Deduction and Publication 530, Tax Information for New Homeowners.