J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

15.8 “Points”

Lenders sometimes charge “points” in addition to the stated interest rate. The points increase the lender’s upfront fees, but in return borrowers generally are charged a lower interest rate over the loan term. Points are either treated as a type of prepaid interest (15.14) or as a nondeductible service fee, depending on what the charge covers. If the points qualify as interest, they are deductible over the term of the loan unless they are paid on the purchase or improvement of your principal residence, in which case they are deductible in the year they are paid, as discussed below. If you pay points on a loan to purchase or improve a second home, you must deduct the points ratably over the term of the loan.

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Caution

Service Fees Are Not Deductible Points

You may not deduct as points amounts that are for specific lender services. To be deductible, points on the purchase of a principal residence must be prepaid interest for the use of the loan money.

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Points are treated as interest if your payment is solely for your use of the money and is not for specific services performed by the lender that are separately charged. Whether a payment is called “points” or a “loan origination fee” does not affect its deductibility if it is actually a charge for the use of money. The purpose of the charge—that is, for the use of the money or ...