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what is prepaid interest on a mortgage loan

Because the irs considers discount points to be prepaid mortgage interest, they are tax deductible only for the year in which they were paid. For example, on a $200,000 loan, each point would cost.

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Topic No. 504 Home Mortgage Points | Internal Revenue Service –  · Topic Number 504 – Home Mortgage Points. The term points is used to describe certain charges paid to obtain a home mortgage. points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A.pdf, Itemized Deductions.If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage.

Prepaid interest financial definition of prepaid interest – prepaid interest. An interest paid in advance of the time it is earned, as with discount points. Prepaid interest is not tax deductible unless all the following specific requirements are met: 1. The loan is secured by the taxpayer’s primary residence. 2. Paying discount points is an established business practice in the area. 3.

If your goal is to pay less money to the lender in the long run, both refinancing (by lowering your interest rate or shortening the term of the loan) and prepaying your mortgage (by lowering the total amount you owe the lender and shortening the term of the loan) can do this.

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