Interest Paid at Settlement

At the settlement or closing on a new home loan, it's common for the buyer to be charged a small amount of "prepaid interest." This generally represents mortgage interest on your loan amount from the day of settlement to the end of the current month, so it's less than an ordinary monthly mortgage payment. Such prepaid interest is deductible home mortgage interest, and since it applies to the portion of the month immediately following the closing date, for calendar-year taxpayers, it would be deductible for the same tax year in which the closing date falls.

You cannot count as "interest" the fees your lender charges you to make the loan, such as an application fee, appraisal fee, credit check fees, fees for private mortgage insurance (PMI), etc. These amounts are not deductible, nor are they added to the cost of your home for purposes of calculating gains or losses when you sell.

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