Mortgage points are prepaid interest that you pay at closing to lower the interest rate over the term of your loan. In addition to the lower interest rate, you also can claim an income tax deduction for the points paid. If you pay the points on your first mortgage, you can deduct the entire amount in the year that you pay them. If you pay points on your refinance, you have to calculate the amount you can deduct because you must prorate them over the term of the refinance.
1. Multiply the years in the term of the loan by 12 to find the number of monthly payments you will make over the term of the refinance. For example, if you have a 30-year refinance, multiply 30 by 12 to find you make 360 payments.
2. Divide your points paid on your refinance by the number of monthly payments to find the points paid per month. In this example, if you paid $2,880 in points, divide $2,880 by 360 to get $8 per month.
3. Multiply the monthly point amount by the number of monthly payments made during the year. For example, if in the first year of your refinance you pay four months, multiply four times $8 to find you could deduct $32 that year. In future years when you make 12 payments, multiply $8 by 12 to find you can deduct $96 per year.
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