A second mortgage allows you to tap into the equity of your home for an expense such as college, home improvements or a new car. When you take out a second home mortgage, the bank may offer to let you pay discount points to lower the interest rate on your loan. If you pay them, you can claim a tax break for them.
Qualifying Points
Only points paid as a form of prepaid interest on your second home mortgage can be included as part of your deduction. Sometimes lenders will refer to various closing costs or other fees as origination points, but these cannot be deducted from your income taxes. When you paid discount points, you receive a lower interest rate on your second home mortgage based on the number of points you pay.
Second Mortgage Point Deduction Time Frame
When you take out a second mortgage, you are not using it to purchase or build your home, so you cannot deduct the points in full in the year you pay them. Instead, you can deduct a portion of the points paid over the life of the loan as long as your second home mortgage is not more than 30 years, it shares the loan terms as other loans in your area and either your second home mortgage is less than $250,000 or you paid less than four points for a term of 15 years or less or less than six points for a term of more than 15 years. To deduct points, your second mortgage must be on a home, but it does not have to be your main home.
Early Payoff Deduction
If you pay off your second home mortgage early and you have been prorating your deduction, you can write off the remaining points in the year you pay off the mortgage. For example, if you paid $2,500 in points on a 25-year second home mortgage, you would be able to deduct $100 per year. However, if you paid off the second home mortgage after 10 years, you would have $1,500 remaining in undeducted points, so you can deduct the remainder in the year you pay off the second home mortgage.
Reporting on Taxes
To write off the discount points paid on a second home mortgage, you must itemize your deductions rather than claiming the standard deduction. To itemize, file Schedule A and Form 1040. Before itemizing, consider the value of your itemized deductions versus the value of the standard deduction. To be worth itemizing, your itemized deductions, including your second home mortgage points, must exceed the standard deduction.
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