What are Mortgage Points?
September 14, 2017
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The mortgage process is complicated, and some of the terms used can be confusing. One term that is often found in a home loan application or a mortgage refinance alongside the discussion of interest rates is "points," also called "discount points." These points are a way of describing how you will pay off your mortgage and what sort of discounts you will be afforded by your lender. They come in several different varieties.
What are points?
In their simplest form, points are equal to 1 percent of the total loan amount. This means that, on a loan of $200,000, one point would equal $2,000. Points are typically paid to the lender upon closing of the loan, and a lender can choose to charge a borrower one or more points. Two or three points are the typical amount.
What kind of points are there?
Points come in two basic varieties:
- Origination points. These are used to pay loan officers for costs related to closing on a loan. They are not tax-deductible, but can be waived by the lender at its discretion.
- Discount points. Discount points are essentially prepaid interest fees, meaning that the more points paid on a loan, the lower the interest rate will be. Discount points are tax deducible.
Should I pay points?
Answering whether or not a buyer should pay points can be tricky, but it largely boils down to how long you plan to stay in the home. While paying more points may be a high upfront cost, the lower interest rate can save you money that can well exceed what you paid in points in the long run. However, if you are thinking of selling after a few years, the higher interest may end up costing you less.