What Are Mortgage Points?
Anyone who has ever shopped for quotes on a mortgage to find out just how much it might cost has likely heard about mortgage points. Though the term might seem abstract, the concept is actually quite simple. Mortgage points describe certain charges to be paid in order to obtain a mortgage on a home. Each mortgage point is a fee based on one percent of the total amount of the loan.
Borrowers should bear in mind that there are two different kinds of mortgage points-discount points and origination points-and that lenders do not all charge the same amount for these different types of points. Discount points refer to an amount of money paid to a lender to obtain a loan at a specific interest rate. These points are like pre-paid interest on a loan that a borrower takes out for a new home, with each point equaling to 1% of the total principal amount of the loan. For example, if a loan is for $100,000, one point is worth $1,000. Each point one purchases will therefore lower his or her interest rate by some amount. Most borrowers will be able to decide how many points they wish to purchase. However, they are usually limited to purchasing around four points. The number of points a borrower chooses to
purchase will depend on how much he or she wishes to lower his or her interest rate. Discount points are paid at closing, and, although buyers may not pay points on FHA or VA guaranteed loans, sellers can. On most mortgages, either the buyer or seller can pay the points; alternatively, the two parties can split the payment between themselves. An important feature of mortgage points is that they are tax deductible as a home mortgage interest if the deductions are itemized on Form 1040, Schedule A.
Origination points are used to pay for the costs of obtaining the loan in the first place. They are much less popular than discount points, as they do not provide borrowers with any valuable benefits and are not tax deductible. Borrowers are therefore better off trying to get a loan that does not require them to acquire these kinds of points.
The decision to get mortgage points depends on a few key considerations. The length of time one plans to live in the house and the amount of the down payment one will be putting down are two such factors. A mortgagor who plans to live in the house for many years would benefit from obtaining discount points because they will lower the interest rates for the long term.
Answered almost 9 years agoSource: qna.mortgagenewsdaily.com