What Are Mortgage Points?
There are several costs involved in mortgage loan transactions. One of the closing costs charged by the lender is called ‘mortgage points’ or just ‘points.’ One ‘point’ is the equivalent of 1 percent of the loan amount. For example, if you purchase a home and borrow $100,000, every point would cost $1,000. These points are charged by the lender to obtain the amount borrowed at a particular rate. Points can be negotiated between the buyer and seller and can be paid by either party.
Additionally, there are two kinds of mortgage points: origination fees and discount points.
Origination fees are fees charged by a lender for the cost of originating the loan. In other words, this is the lender’s income for doing the loan. Origination fees may or may not be tax deductible — you should check with tax adviser.
Discount points are also charged by the lender at closing, but these points actually “buy down” the interest rate that is charged on the mortgage loan. Discount points are considered prepaid interest and are tax deductible. The more discount points paid on the loan, the lower the interest rate. Lenders’ charges for points can range from 0 to as many as the borrower would like to pay to lower their rate (usually no more than 3 or 4).