Save Money in Taxes With The Mortgage Interest Tax Deduction

Home ownership carries the tremendous benefit of enabling the owner to deduct the interest paid the previous year on a mortgage loan. Along with this benefit, as a homeowner, you may also deduct points for refinancing or purchasing a new home. Don't overlook this deduction, it's an opportunity to save on your taxes.

One point equals 1% of the loan amount, paid at the time of closing. In exchange for paying this fee up front you get a lower interest rate. This is often referred to as "buying down your rate." At tax time each year, your lender is required to issue you a Form 1098 indicating both the interest you've paid, as well as the points that were paid at closing. Take a close look at your 1098 statements. If you paid points last year they should be itemized on this document.

The seller will often pay part or sometimes all of the points for you. Even when the seller pays the points, the buyer still gets to claim the deduction. In order to qualify for the deduction, the points must have been paid on your primary residence. You must report the points in the year they were paid and claim the deduction for that year. You must be able to document that the points were paid on the mortgage.

Depending on the use of the loan proceeds, points paid when refinancing a mortgage may also be tax deductible. The key is that the proceeds are being used for actual refinancing or home improvements rather than coverage for other debts or assets.

So, if you're a home-owner, be sure to see if you qualify for the mortgage-interest tax break this year, and use our free mortgage tax deduction calculator to see how much you can save in taxes.