Most loan application fees aren’t deductible on a personal return; the part treated as prepaid interest (often called points) may qualify when you itemize.
Loan paperwork comes with a pile of charges, and lenders don’t always label them in a way that helps at tax time. One line might say “application fee,” another says “origination,” and another says “points.” Some of those costs can lower your tax bill. Many can’t.
This article sorts the fees into clear buckets, shows where each bucket tends to land on a U.S. federal tax return, and gives you a quick way to check your own documents.
What Counts As A Deduction For Loan Fees
For most people, loan fees fall into two categories:
- Interest or prepaid interest: money paid for the use of borrowed funds. This is where mortgage points and prepaid interest can fit.
- Services and paperwork: money paid to open, process, and approve the loan. Application fees and underwriting fees usually land here.
That split matters because the tax code treats interest differently from service charges. A fee being “1% of the loan” doesn’t make it interest.
Loan Application Fees And Closing Costs You’ll See Most Often
Statements vary, yet most charges show up with familiar labels:
- Application fee
- Origination fee
- Discount points
- Underwriting fee
- Processing or administrative fee
- Prepaid interest (often shown as “per diem interest”)
- Appraisal and credit report fees
Start by locating these items on your loan estimate, Closing Disclosure, or settlement statement. Then sort them into “interest” or “services.”
Are Loan Application Fees Tax Deductible For Mortgages And Refinances?
Most charges that lenders call an “application fee” are service charges, not interest. On a personal return, that kind of cost typically doesn’t produce a deduction.
The exception is when the charge is prepaid interest. In mortgage language, prepaid interest is often packaged as points. The IRS treats qualifying points as home mortgage interest in many cases, which means they may be deductible if you itemize on Schedule A.
Two IRS pages are the best starting points: IRS Publication 936 (Home Mortgage Interest Deduction) and IRS Topic 504 (Home Mortgage Points). They explain when points can be deducted right away and when they must be spread across the loan term.
When Points Can Be Deducted In The Year Paid
Points paid to buy or build your main home can sometimes be deducted in the year paid. This often hinges on items like local custom, points stated as a percentage of the principal, and the points not replacing other fees (like appraisal or title work).
Lenders often report deductible points on Form 1098. If your points show up there and you itemize, that’s a strong clue you’re in the “possible deduction” lane.
When Points Must Be Spread Across The Loan Term
Points paid on a refinance are often deducted over the loan term, not all at once. If you pay off the loan early, the remaining unclaimed points can sometimes be taken in the payoff year, based on the facts of the refinance and payoff.
Seller-Paid Points And Credits
In some purchases, the seller pays points on the buyer’s behalf. The IRS can treat the buyer as paying them in certain cases, so keep the Closing Disclosure and the purchase contract together.
How To Spot A Real Point Vs A Service Fee
Use this quick triage on your paperwork:
- Check the label. “Discount points” and “loan discount” often signal prepaid interest. “Application,” “processing,” “underwriting,” and “admin” usually signal services.
- Check the purpose. Ask the lender: “Is this prepaid interest for a lower rate, or payment for loan services?”
- Check Form 1098. Points listed there are commonly treated as mortgage interest.
This keeps you from chasing deductions that don’t exist and helps you document the ones that do.
Where Deductions Show Up On Your Return
Even when a charge qualifies, it needs the right spot on the return.
- Schedule A (itemized deductions): home mortgage interest and qualifying points land here.
- Schedule E (rentals): points tied to a rental property are commonly deducted over the life of the loan.
- Business schedules: borrowing tied to business activity follows business rules, often involving spreading certain financing costs over time.
The practical takeaway: if you take the standard deduction, points on Schedule A won’t change your tax bill because you’re not itemizing. The IRS explains where mortgage interest and points are entered in the Instructions for Schedule A (Form 1040).
What Usually Isn’t Deductible (And What It Might Affect)
Many loan-related charges are not interest. Common non-interest fees include application, underwriting, processing, appraisal, and credit report charges. These are usually personal expenses on a home loan used for personal living.
Some real-estate closing costs that aren’t deductible can still matter later by affecting your home’s cost basis. Basis tracking can matter when you sell. Points are a separate category from basis, since they’re treated as interest when they qualify.
Home Purchase Loans: The Clearest Case For Points
For many taxpayers, a purchase loan on a main home is the cleanest path for a points deduction. The reason is simple: points are prepaid interest, and prepaid interest can count as mortgage interest when the rules line up.
The IRS lists common point names and homeowner tax treatments in IRS Publication 530 (Tax Information for Homeowners). Use that list to decode lender wording on your Closing Disclosure.
What To Ask Before Closing Day
If your estimate shows both “origination” and “points,” ask the lender to spell out which charge is prepaid interest and which charge is for services. Get the answer in an email. Then compare it to the final Closing Disclosure. Small wording changes between the estimate and the final statement can change how you treat the fee.
Also check whether the points are paid with cash at closing or rolled into the loan balance. Your paperwork usually shows this in the “Calculating Cash To Close” section. That detail can affect timing when you claim points on a main-home purchase and can also explain why a number did not land on Form 1098.
TABLE 1
Common Loan Fees And Their Typical Tax Treatment
| Fee Type (Common Label) | What It Usually Pays For | Typical Treatment For Individuals |
|---|---|---|
| Application fee | File setup and lender review | Usually not deductible |
| Underwriting fee | Approval and risk review | Usually not deductible |
| Processing / admin fee | Document handling and lender operations | Usually not deductible |
| Origination fee | Loan creation and lender compensation | Often not deductible unless it’s truly points |
| Discount points / loan discount | Prepaid interest to lower the rate | May be deductible as mortgage interest when itemizing |
| Prepaid interest (per diem) | Interest from closing date to first payment | Often deductible as mortgage interest when itemizing |
| Appraisal fee | Property valuation for lender use | Usually not deductible |
| Credit report fee | Credit pull and report | Usually not deductible |
| Title and recording charges | Ownership checks and legal recording | Usually not deductible (may affect basis) |
Refinancing And Cash-Out Loans: Getting The Timing Right
Refinances are where people get tripped up. You might pay points again, yet the deduction can be spread across the new loan’s term.
If part of the refinance proceeds are used to improve the main home, the portion of points tied to that improvement can sometimes follow a different timing rule than the rest. The split depends on records and how the proceeds were used.
Practical recordkeeping is plain: keep the Closing Disclosure, the payoff statement from the old lender, and receipts for any improvement work tied to the loan proceeds.
Rental Property Loans: Different Forms, Different Timing
On rentals, points and certain financing charges are commonly deducted over the loan life on Schedule E. The win is consistency: track the yearly amount and keep the settlement statement so your numbers match the paperwork.
TABLE 2
Fast Checks Before You Claim Any Loan Fee
| Check | What To Look For | What It Often Means |
|---|---|---|
| Itemizing vs standard deduction | Do you file Schedule A? | No Schedule A often means no benefit from mortgage points |
| Form 1098 | Points listed on the form | Common clue the charge is treated as mortgage interest |
| Closing Disclosure wording | “Discount points” vs “processing fee” | Points lean toward interest; processing leans toward services |
| Loan purpose | Buy/build/improve vs refinance vs personal use | Purchase loans more often allow faster point deductions |
| Refinance payoff | Loan paid off early | Remaining points may be claimed in payoff year in some cases |
| Paper trail | Closing docs saved in one folder | Easier to match the deduction to the fee description |
Records To Save So The Numbers Hold Up
If you claim points or prepaid interest, keep records that tie the fee to interest and tie the interest to a qualified loan.
- Closing Disclosure or settlement statement showing points and prepaid interest
- Form 1098 from the lender
- Proof of payment at closing (wire confirmation or bank record)
- A short note on loan purpose (purchase, refinance, improvement)
- Receipts for improvements paid with refinance proceeds, if that applies
A Quick Walkthrough Using Your Own Paperwork
Take your fee list and run it through this short sequence:
- Mark points and prepaid interest first. Those are the main candidates for a deduction.
- Mark service fees next. Application, underwriting, processing, appraisal, credit report.
- Match what’s left to the right schedule. Schedule A for qualifying mortgage interest and points when itemizing, or the schedule tied to rental or business activity.
If you’re stuck on a single line item, don’t guess. Get the lender’s description of what the fee pays for and save it with your closing packet.
References & Sources
- Internal Revenue Service (IRS).“Publication 936: Home Mortgage Interest Deduction.”Details when mortgage interest and points can be deducted and the limits that can apply.
- Internal Revenue Service (IRS).“Topic No. 504: Home Mortgage Points.”Explains how points are treated on new mortgages and refinances, including timing rules.
- Internal Revenue Service (IRS).“Instructions for Schedule A (Form 1040).”Shows where to enter mortgage interest and points when itemizing deductions.
- Internal Revenue Service (IRS).“Publication 530: Tax Information for Homeowners.”Defines points and related terms used on home loan paperwork.