Points refer to prepaid interest on a home mortgage and can be fully deductible by the buyer in the year paid if the right conditions exist. The points must be used to buy, build or improve a taxpayer's principal residence but not all fees charged by the lender are necessarily deductible.
According to IRS Publication 936, "The term 'points' is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. A borrower is treated as paying any points that a home seller pays for the borrower's mortgage."
"Points" can be confusing! When I am teaching Real Estate Pre-License School at Martin & Fellows Real Estate School, the session on Financing always elicits some puzzled looks of confusion.
If you purchased a home in 2011, have your tax professional evaluate your closing statement to see if there are loan fees that may be used as a deduction on your tax return regardless of whether you or the seller paid them.
Refinancing a principal residence or purchasing an investment or income property require that points must be deducted ratably over the term of the mortgage rather than deducting them fully in the year paid. Borrowers in these situations should consider the benefits of lower interest rates from paying point to higher interest rates without points.
This article is meant to provide information that can be discussed with your tax professional about your specific situation and is not to be considered tax advice.