When people want to find out how much their
mortgages cost, lenders often give them quotes that include both
loan rates and "points."
What exactly is a point?
A point is a fee equal to 1 percent of the loan amount. A 30-year,
$150,000 mortgage might have a rate of 7 percent, but come with
a charge of 1 point, or $1,500.
A lender can charge 1, 2 or more points. There are
two kinds of points -- discount points and origination points.
These are actually prepaid interest on the mortgage loan. The
more points you pay, the lower the interest rate on the loan
and vice versa. Borrowers typically can pay anywhere from zero
to 3 or 4 points, depending on how much they want to lower their
rates. This kind of point is tax-deductible.
||Origination fee: This
is charged by the lender to cover the costs of making the loan.
The origination fee is deductible if it was used to obtain the
mortgage and not to pay other closing costs. The IRS specifically
states that if the fee is for items that would normally be itemized
on a settlement statement, such as notary fees, preparation
costs, and inspection fees, it is not deductible.
How do you decide whether to
pay points, and how many?
That depends on a number of factors, such as how much money you
have available to put down at closing and how long you plan on staying
in your house.
Points as prepaid interest help reduce the interest
rate. If you plan to stay in your home for a while, it may be worth
reducing the interest rate by paying points.
The best option depends on your individual needs,
but, if you need the lowest possible closing costs, choose the zero-point
option on your loan program.
By the numbers ...
A lender might offer you a 30-year fixed mortgage of $165,000 at
6 percent interest with no points. The monthly mortgage principal
and interest payment would be $989. If you pay 2 points at closing
(that's $3,300) you can bring the interest rate down to 5.5 percent,
with a monthly payment of $937. The savings difference would be
$52 per month. But it would take 64 months to earn back the $3,300
spent upfront via lower payments. If you're sure you will own the
house for more than five-and-a-half years, you save money by paying