Points are usually “amortized” over the life of the loan. Points on a 30-year mortgage are deducted over 360 months. But you can deduct the total number of points paid in full in the year paid on a mortgage used to purchase, build or substantially improve your principal residence.
To deduct the points in full in the year of purchase, the amount of money paid at closing, including any seller-paid points and the initial down payment or deposit, must at least equal the number of points charged. If the points on a $300,000 mortgage are $6,000 and you had made a $1,000 deposit and paid $25,000 at closing, the $6,000 is fully deductible.
Points paid to refinance your principal residence or to purchase or refinance a vacation home or investment property must be amortized over the life of the mortgage. However, if you refinance a mortgage on your principal residence in order to get additional money to improve the residence substantially, you can deduct in full the points paid on the funds used for the improvements.
If you pay-off a mortgage on which you have been amortizing points - you sell the property or refinance the mortgage with a new lender - you can deduct the amount of “unamortized” points on that mortgage in full in the year of the pay-off. If you paid $3,600 in points on a 30-year mortgage to purchase a vacation home and have deducted a total of $540 in points on prior years’ tax returns, then when you sell the home, you can deduct $3,060 in points on Schedule A.
But this doesn’t work if you refinance the mortgage with the same lender. You purchased the vacation home with a mortgage from Chase. You refinance the mortgage with Chase to get a lower interest rate and to reduce the term to 15 years. There are no points on the refinance. Because you refinanced with the same lender, the remaining $3,060 in unamortized points must continue to be amortized over the 180 month term of the new loan.
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