Many home buyers pay points to get a more favorable mortgage rate. Points, including loan origination fees, are prepaid interest. The points are deductible in the year you or the seller pays them.
The parents reduced their taxable income by $5,000 by deducting their home mortgage points and loan origination fees. Since the parents income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $1,500 ($5,000 x 30%).
If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by deducting your home mortgage points and loan origination fees.