What points are
Discount points are an upfront fee you can pay to lower your interest rate. One point usually equals 1% of the loan amount. With CapCenter's ZERO Closing Costs (restrictions apply), lender closing costs are covered, so points are an optional cost you choose only if the trade-off makes sense for you.
Why refinance points are spread out
For a home purchase, points can often be deducted in the year you pay them if certain conditions are met. Refinance points are different. Tax rules generally treat them as prepaid interest that you deduct gradually, over the term of the new loan.
This is general information, not tax advice. Rules change, and your situation matters, so talk with a tax professional.
A simple example
Hypothetical example. Say you pay $3,000 in points on a 30-year refinance. Spread evenly over 30 years, that is about $100 a year you may be able to deduct, if you itemize. Your actual deduction depends on your loan, your tax situation and current rules.
If you refinance again or sell
If you pay off the loan early, by selling or refinancing with a different lender, you may be able to deduct the remaining undeducted points in that year.
If you refinance again with the same lender, the rules can be different. The remaining points may need to be spread over the new loan instead. A tax professional can tell you which applies.
The home improvement exception
If part of a refinance, such as a cash-out refinance, is used to substantially improve your main home, the points tied to that portion may be deductible in the year you pay them. The rest are still spread out. Keep records showing how you used the money.
Things to keep in mind
- You generally have to itemize deductions to benefit
- Your lender reports points paid on Form 1098 in many cases
- Points paid by the lender as a credit may be treated differently
- State tax rules may differ from federal rules
- Keep your Closing Disclosure for your tax records
Should you pay points at all?
The tax deduction is a small bonus, not the main reason to buy points. The bigger question is how long you will keep the loan. If you might refinance or sell within a few years, you may not stay long enough to come out ahead. Your loan consultant can compare options with and without points.
