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What Are Points?

Two different types of points exist in regard to home mortgages:
  1. Origination points
  2. Discount points
Both of these are fees that are typically paid at the time of settlement.

Origination points are designed to recoup part of the cost of providing the mortgage to the borrower. In general, a different number of points are charged for each of the type of mortgages that are offered by the lender.

Discount points are used in a “rate buydown,” or to lower the interest rate on the mortgage. Discount points lower the interest rate for the entire term or life of the mortgage. Typically, one point might lower the interest rate one quarter of a percent for a fixed rate mortgage.

Discount points are only charged to those who request a lower interest rate for the mortgage and are willing to pay additional points to get it. Additionally, if you itemize on Schedule A of your IRS Tax Form 1040, you might be able to include the discount points from your mortgage for the year in which they are paid.*

One point is equal to 1% of the amount of the loan. If you imagine that the amount of a loan is $100,000, then one point is equal to $1,000, or 1% of the loan. If three points are charged on the loan, the points are equal to $3,000.

The lender who provides the mortgage loan determines the number of origination points that will be charged for the loan. Points are negotiated at the beginning of the loan process along with the term of the loan and the interest rate.

Since it is up to the lender whether points are charged for a mortgage, not all mortgages will require that the borrower pay origination points. Most lenders offer discount points, and this is often reflected in their mortgage options. For example, the lender might offer three different interest rates with three different sets of points attached to them.

* Consult a tax advisor for details.

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What are points? 1
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