Editor's Note: This article is part of our 2014 Tax Tips series. Robert Flach is an expert with more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.

NEW YORK (MainStreet) — Borrowers will often pay "points" to obtain a mortgage. Points are a form of pre-paid interest. By paying points upfront the borrower can reduce the interest rate on the loan and reduce the monthly payment. One point on a $100,000 mortgage is $1,000. Points, aka Loan Origination Fee or Loan Discount, are usually reported on Lines 801-803 on the Closing Statement and can be deducted as interest on Schedule A.

Generally you must "amortize" points over the life of the loan. Points on a 30-year mortgage are deducted over 360 months. But you can deduct the total amount of points paid in full in the year paid on a mortgage used to purchase, build or substantially improve your principal residence.

The amount of money paid at closing and the initial down payment or deposit must at least equal the amount of points charged. If the points on a $300,000 mortgage are $6,000 and you had made a $1,000 deposit and paid $25,000 at closing, the $6,000 is fully deductible.

If you pay points to refinance your principal residence or to purchase or refinance a vacation home or investment property they must be amortized over the life of the mortgage. But if you refinance a mortgage on your principal residence to get additional money to substantially improve the residence you can deduct in full the points paid on the money used for the improvements.

If you pay-off a mortgage on which you have been amortizing points - you sell the property or refinance the mortgage with a new lender - you can deduct the amount of remaining "unamortized" points on that mortgage in full in the year of the pay-off. You paid $3,600 in points on a 30-year mortgage to purchase a vacation home. You have deducted a total of $540 in points on prior years' tax returns. You sold the home in 2013. You can deduct $3,060 in points on your 2013 Schedule A.

This doesn't work if you refinance the mortgage with the same lender. You purchased the vacation home with a mortgage from Chase. You refinance the mortgage with Chase to get a lower interest rate and to reduce the term to 15 years. There are no points on the refinance. Because you refinanced with the same lender the remaining $3,060 in unamortized points must continue to be amortized over the 180 month term of the new loan.

--Written by Robert D. Flach for MainStreet