Buying a home comes with tax benefits, but it’s important to know what is and isn’t tax deductible. Learn whether your loan origination fee is tax deductible.
One of the lesser known benefits of becoming a homeowner is the tax deductions you will receive. However, knowing what homebuyer costs qualify for a tax deduction can be confusing. You undoubtedly signed a mountain of paperwork at your closing, but do you really know what you signed?
Assuming you don’t buy homes regularly, you aren’t expected to know all the finer points—that’s what your real estate agent is for. But now that you’ve closed on your house, moved in, and have finally gotten settled, it’s time to look at the future implications of your purchase.
When it’s time to file your taxes, you’ll need to go back to your closing documents to determine what your allowable deductions are and how you need to properly file them in your tax return. We’re going to cover one piece of the closing cost puzzle—the loan origination fee.
What is a loan origination fee?
A loan origination fee is what the mortgage lender charges you for all the paperwork and documentation that’s associated with your real estate transaction. The loan origination fee includes the fees associated with your loan as well as a fee that’s paid to the loan officer who initiates and completes your loan transaction.
This fee is only paid if and when the loan funds, therefore part of the loan origination fee serves as a commission to the broker who processed the loan. Loan origination fees are usually broken down into mortgage points, which are a percentage of your loan amount.
How much is a typical loan origination fee?
Loan origination fees vary based on your broker and how complicated your loan is, but typically they cost between 0.5% to 1% of the total value of the loan. Each percent is referred to as one “point,” however loan origination points shouldn’t be confused with discount points, which are percentage points you can pay upfront to lower your interest rate.
Still, the IRS counts both origination fees and discount points as prepaid interest when you file your taxes, and they both appear under lender charges on the HUD-1 Settlement Statement and the Good Faith Estimate of your closing documents.
Are loan origination fees tax deductible?
Loan origination fees are tax deductible when the fees reflect the prepaid interest on a loan. Additionally, if the seller pays a part of the interest for you, these fees are also tax deductible because you can claim a deduction for the points the seller paid.
If you want to deduct the points from your tax return in the same year you closed on your home, you have to use the loan to build or purchase your home and it has to be your primary residence. There are some additional stipulations, as well:
- Charging points must be an established practice in your area.
- Your deduction can’t exceed the number of points commonly charged in your area.
- You can’t have borrowed the funds you used to pay your points.
- The settlement statement must show the amount of points that were paid toward the closing.
- The points must reflect a percentage of the amount of your mortgage’s principal.
When is a loan origination fee not tax deductible?
Loan origination fees are not tax deductible when your lender uses them for the appraisal or title fees, any legal costs, or prepaid property taxes.
Do I have any other options for deducting my points?
Yes, you have the option of amortizing your points over the life of your mortgage and deducting them from your taxes over the lifetime of the loan. If the home is an investment property, you have to use this option. People usually only choose this option when their itemized deductions end up being lower than their standard deductions for the year in which they purchased their home.
Where can I find deductible and non-deductible loan origination fees?
You can find out which loan origination fees are deductible and which ones aren’t by looking at the settlement statement you signed at your closing. The settlement statement should clearly identify the prepaid interest, which will help you separate the two types of fees. Remember, you can deduct the prepaid interest on your loan, but you can’t deduct the other miscellaneous fees such as the appraisal and title fees, the legal fees, or any of the prepaid property taxes.
Can I deduct my loan origination fees if I’m refinancing?
If you paid points to refinance your mortgage, you have to deduct those over the life of your loan unless you’ve used some of that money to make improvements to your house. Another scenario is if you sell the home or refinance it again before your mortgage expires, then you can use any of those deductions you didn’t previously deduct in the year you sold or refinanced the home.
Note: We are not tax professionals. The content contained in this article is for informational purposes only. Always consult with a tax advisor about your specific tax situation prior to filing your tax returns.
