For example, when a property owner pays the lender a "prepayment penalty" for paying off an existing loan early, the prepayment penalty qualifies as an interest deduction. Many homeowners who refinance their old high-interest- rate mortgages are willing to pay these penalties because their new loans will have much lower interest rates.
Also, most mortgage lenders charge a loan fee. If an existing loan is being assumed by the home-buyer, an assumption fee is usually charged by the lender. Since loan fees paid to obtain a home mortgage qualify as interest deductions, they are fully tax-deductible in the year of obtaining the loan if the loan's purpose is to buy the owner's residence. This rule also applies to refinanced mortgages.
Loan fees and assumption fees are usually quoted as "points." Each point equals 1 percent of the amount borrowed. To illustrate, if you obtain a new $50,000 home loan and the lender charges a 1-point loan fee, you'll pay $500 to obtain that loan. If the lender charges a 2-point loan fee, the tax- deductible interest will be $1,000 (2 percent of the amount borrowed).
But the IRS warns that the loan fee must be paid by personal check to the mortgage lender rather than allowing the lender to subtract the fee from the loan proceeds.
To illustrate this point, suppose you get a new $100,000 home loan for which the lender charges a 2-point ($2,000) loan fee. Most lenders will send only $98,000 to the loan closing.
When that happens, the IRS says the borrower hasn't "paid" the loan fee and, under current tax laws, its deduction must be spread out over the life of the loan.
To avoid this bad result and make the loan fee fully deductible in the year of sale, smart borrowers pay the home-loan fee to the lender by separate check so the lender can deliver the full loan amount to the closing.
