What Are Mortgage Interest, Points, and Insurance Tax Break Credits?

When you buy and own a home, you have both the privilege and the right to deduct some of the expenses of homeownership from your income taxes. Some of these deductions are ongoing, while others only apply one time. Deductible expenses include mortgage interest and point expenses, as well as insurance expense.

Mortgage Points

When you take out a mortgage loan, the lender charges you “points” that must be paid at closing. A point equals one percent of the entire loan amount. For example, if the loan amount is 150,000 dollars, then one point equals 1500 dollars. Points are mutually beneficial for both the homebuyer and the lender: the homebuyer gets a lower mortgage rate, and lenders profit from charging points. If you buy a home, the points that are charged are deductible from your income taxes. Often, the sellers of the home will agree to pay the buyer’s points, but in that case, the buyer can still deduct them.

Mortgage Interest 

Almost any time you take out a loan, you are charged interest. Your mortgage interest is usually set at a fixed percentage rate for the life of the loan. The amount that you pay in mortgage interest over the course of the year is usually deductible from your income tax.

Private Mortgage Insurance

Another tax break credit that can benefit you when you file your taxes is private mortgage insurance deduction. If make a down payment of less than 20 percent of the loan amount when you buy your home, PMI is added to the loan amount. Its purpose is to provide financial protection to the lender in case you default on your loan (i.e., stop making payments). If your adjusted gross income is beneath a certain threshold and your mortgage was issued after 2006, you may deduct PMI from your income taxes.

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