Tax deductions for costs and fees related to your mortgage have become confusing and complicated, which is why the Internal Revenue Service (IRS) has an entire publication devoted to the subject. The following is a summary explaining the allowable tax write-offs for fees and costs related to a mortgage.

• Mortgage Interest: Mortgage interest is the most common deduction taken by homeowners. It represents the ongoing cost of a loan. Interest paid on your mortgage is generally deductible in the year it is paid. Lenders are required to send you a statement each year called a 1098 which reports all of the interest paid during the previous tax year. This amount is deductible on your individual federal tax form on schedule A, line 10.

• Points: Points are sometimes called loan origination fees. They are usually the up-front cost charged by the lender for a particular interest rate. The general rule is that the lower the interest rate charged, the higher the points or loan origination fees. Points charged on a loan used to purchase your principle residence are fully deductible in the year paid. These points are usually reported by the lender on form 1098. They are deductible on line 10 of your schedule A. If the points you paid are not shown on form 1098, then you should deduct them on line 12 of schedule A.This is typical of a home loan done through a broker where you pay the points or origination fees to the broker and not the actual lender. Points charged on a refinance must usually be deducted evenly, each year, over the life of the loan. For example, if your loan is a 30-year loan, the points on a refinance must be spread out evenly over the 30-year period. One exception to this rule is for points paid on a refinance that is used to make home improvements on your principle residence. These points are fully deductible in the year incurred.

• Mortgage Insurance: Mortgage insurance on conventional loans is called “PMI” and on government insured loans such as FHA,  it is called “MMI.” Mortgage insurance is literally an insurance policy for lenders. If a borrower defaults on a loan, the mortgage insurance company makes up the back payments to the lender. Mortgage insurance is a charge that is added to the original loan balance similar to points. On conventional loans, mortgage insurance is added where the “loan-to-value” exceeds 80 percent on a property. This means that if the new loan amount exceeds 80 percent of the value of the property, the mortgage insurance premium gets added to the loan balance. On FHA loans, mortgage insurance is added to all loans regardless of the loan-to-value ratio. Mortgage insurance is fully deductible in the year incurred, and is deducted on line 13 of schedule A. In cases where the mortgage insurance is paid monthly as part of the loan, this amount is also deductible in the year that it’s paid. This monthly payment is also deducted on line 13 of schedule A.

• Prepayment Penalties: Prepayment penalties occur when a borrower pays a loan off earlier than the normal due date of a loan. Some loans have specific pre-payment provisions that stipulate a penalty if a loan is paid-off prior to 3, 5, or 7 years. For example, if your loan contains a 3-year prepayment penalty, if you pay the loan off before three years are up, you’ll be assessed a penalty that must be paid at close of escrow. This penalty varies by lender but is usually six months of interest. For example, if you pay roughly $1,000 per month in interest, the pre-payment penalty would be $6,000. Prepayment penalties are deductible in the year they are paid. Lenders should report this amount on form 1098, and they are deductible on line 10 of schedule A. If they’re not reported by the lender, then they should be deducted on line 11 of schedule A.

Since the deduction for interest, points, mortgage insurance and prepayment penalties can be a large amount, you should consult with a tax professional to determine the correct deduction. Information for these deductions can be obtained at the IRS website at: irs.gov.