Tax Deductions for Arizona Homeowners: How Mortgage Discount Points Can Save You Thousands
If you've recently purchased a home or refinanced your mortgage in the Phoenix metro area, there's a significant tax benefit you might be overlooking. Understanding the tax deductions available to homeowners is one of the most valuable—yet underutilized—benefits of homeownership in Arizona.
One of the most powerful tax strategies available to new homeowners and those who've refinanced is the mortgage discount points deduction. This deduction can put hundreds or even thousands of dollars back in your pocket, and it's available to you right now if you paid points on your mortgage this year.
What Are Mortgage Discount Points?
When you secure a mortgage, your lender gives you the option to "buy down" your interest rate by paying discount points upfront at closing. Each point typically costs 1% of your total loan amount and reduces your interest rate by approximately 0.25%.
Here's what makes this strategy particularly attractive: you receive a double financial benefit.
First, you'll enjoy lower monthly mortgage payments due to the reduced interest rate. Second, you may be able to fully deduct those points on your federal tax return in the year you paid them.
This dual advantage represents one of the key benefits of homeownership that renters simply cannot access. While renters receive no tax benefits from their monthly housing payments, homeowners in Arizona can leverage multiple tax deductions to reduce their overall tax burden.
Understanding the Tax Savings Potential
Let's look at a realistic Phoenix metro area example. If you purchased a home with a $400,000 mortgage and paid 2 points to reduce your interest rate, you would have paid $8,000 upfront. If you meet the IRS requirements (which we'll cover next), that entire $8,000 could be deductible in the year you paid it.
For a homeowner in the 24% federal tax bracket, that deduction could result in nearly $2,000 in tax savings—in addition to the lower monthly payments you're already enjoying from the reduced interest rate.
You can explore your potential tax savings using Freddie Mac's tax savings calculator to see how this deduction might benefit your specific situation.
Who Qualifies for the Mortgage Points Deduction?
According to the IRS guidelines on home mortgage points, you can fully deduct mortgage points in the year you paid them if your situation meets specific criteria.
Basic Requirements
Your situation must meet these fundamental conditions:
Primary residence requirement: The loan must have been used to purchase, build, or substantially improve your primary residence—the home where you actually live. Second homes and investment properties have different rules.
Standard practice: Paying points must be an established business practice in the Phoenix metro area (it is).
Clear documentation: The points must be clearly itemized on your settlement statement or closing disclosure.
Payment source: You cannot have borrowed the money from your lender to pay for the points—they must come from your own funds (though your down payment and other payments at closing can count toward this).
Additional IRS Criteria
The IRS also requires that:
The amount you paid in points is consistent with what's typical in the Arizona market
Points are calculated as a percentage of your mortgage principal amount
You use the cash method of accounting (the vast majority of individual taxpayers do)
The points weren't used to cover other closing costs such as appraisal fees, title insurance, property taxes, or inspection fees
Most homeowners who paid discount points when purchasing or refinancing their Arizona home will naturally meet these requirements. The key is understanding that these rules exist and ensuring your documentation is in order.
How to Claim Your Mortgage Points Deduction
Your mortgage lender handles much of the documentation work for you, making this deduction straightforward to claim.
Step 1: Obtain Your Form 1098
Your lender is required to send you Form 1098 (Mortgage Interest Statement) by January 31st following the tax year. This form reports the points you paid during the year, along with your mortgage interest paid.
Step 2: Review Your Closing Documents
Cross-reference the amount shown on Form 1098 with your closing disclosure or settlement statement from when you purchased or refinanced your home. The points should be clearly labeled, often as "discount points" that reduce your interest rate.
Step 3: Report the Deduction
When you file your federal tax return, you'll report the points on Schedule A (Form 1040), Line 8a. This is where you itemize your deductions, which also includes your mortgage interest and property taxes.
Step 4: Verify Everything is Accurate
Whether you prepare your own taxes or work with a tax professional, verify that all eligible points are accounted for on your return. If you're working with a CPA or tax preparer, inform them early that you paid mortgage points this year so they can ensure the deduction is properly claimed.
For more detailed guidance on the tax filing process, TurboTax offers a comprehensive guide on deducting mortgage points.
What If You Refinanced Your Mortgage?
The rules are slightly different for refinanced mortgages. When you refinance, you typically must deduct the points over the life of the loan rather than all at once in the first year—unless you used part of the refinanced amount to substantially improve your primary residence.
For example, if you refinanced with a 30-year mortgage and paid $6,000 in points, you would generally deduct $200 per year ($6,000 ÷ 30 years) for the life of the loan.
However, there are exceptions. If you refinance again or sell the home, you can deduct any remaining points in that year. The specific rules can be complex, which is why consultation with a tax professional is valuable for refinance situations.
Other Tax Benefits of Homeownership in Arizona
While mortgage discount points offer substantial savings, they're just one piece of the larger tax benefit puzzle for Arizona homeowners. Understanding the full scope of tax deductions homeowners can claim helps you maximize your savings.
Mortgage Interest Deduction
Beyond points, the interest you pay on your mortgage is also tax-deductible (up to certain limits). For most Arizona homeowners, this is one of the largest itemized deductions available.
Property Tax Deduction
Arizona property taxes can be deducted on your federal return (up to $10,000 when combined with state and local taxes).
Home Equity Loan Interest
If you took out a home equity loan or line of credit to substantially improve your property, that interest may also be deductible.
Energy-Efficient Home Improvements
Federal tax credits are available for certain energy-efficient improvements, which can be particularly valuable given Arizona's climate and energy costs.
Timing Matters: Take Action Before Tax Season
Tax season arrives quickly, and preparation is essential for maximizing your deductions. Here's what you should do now:
For recent homeowners: Gather your closing disclosure and watch for your Form 1098 in January. Flag this deduction in your tax filing checklist so you don't overlook it.
For those who refinanced: Review your closing documents to determine if you paid points and consult with a tax professional about the proper deduction method for your situation.
For future homebuyers: When you're shopping for a mortgage, ask your lender about the trade-offs between paying points for a lower rate versus a no-point loan. Understanding this tax benefit should factor into your decision.
Protecting Your Investment and Your Tax Benefits
Understanding tax deductions is just one aspect of successful homeownership. Properly maintaining your home protects both your investment and your ability to benefit from homeownership tax advantages in the future.
Freddie Mac provides excellent resources for Arizona homeowners:
Understanding your home's value and factors that influence it
Home maintenance guide for year-round property care
Caring for your home with seasonal checklists
Regular maintenance not only preserves your home's value but also ensures you're positioned to benefit from tax deductions related to substantial improvements when you refinance or upgrade.
Ready to Explore Your Homeownership Options?
If you're considering selling your home in the Phoenix metro area, wondering whether refinancing makes sense for your situation, or simply want to understand how to maximize the financial benefits of homeownership in Arizona, I'd love to help.
As a local realtor who specializes in helping clients understand not just the property itself but the complete financial picture of homeownership, I provide guidance for my clients to make informed decisions that support their long-term financial goals.
Schedule a free discovery call today. We'll discuss your unique situation, explore your options, and ensure you have the information you need to make confident decisions about one of the most significant investments you'll ever make.
Disclaimer: This information is for educational purposes and should not be considered tax advice. Tax laws are complex and individual situations vary. Please consult with a qualified tax professional for advice specific to your circumstances. The tax information provided here is based on current federal tax law and may be subject to change.
Last updated: October 2025
