Money can be borrowed for vacations, parties or to pay off other debt. The deductibility of home equity interest provides substantial opportunity for sophisticated tax planning. The interest rate on home equity debt is usually calculated based on the current prime rate, plus one or two percentage points. Not only would you pay a lower rate, but you could also write off the interest as a tax deduction. Another area of home ownership where people routinely miss potential tax savings involves the points they pay to borrow money.
Banks often charge fees, or points, for the privilege of borrowing money.
They are also called loan origination fees, maximum loan charges or premium charges. If the payment of any of these charges is solely for the use of money, then it is considered interest. The amount you pay in points is deductible in full in the year of payment only if the loan is to buy or improve your main home. Points paid to refinance your home mortgage are not deductible in the current year. They must be deducted on a pro-rated basis over the life of the loan.