Homebuyers who will request quotes from lenders for mortgage financing will find that these quotes will often include both loan rates and "points." For many potential homebuyers they find themselves confused as to exactly what is a point?

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

A point is a fee equal to 1 percent of the loan amount. For example, A 30-year, $200,000 mortgage might have a rate of 6 percent, but come with a charge of 1 point, or $2,000. A lender can charge 1, 2 or more points. There are two kinds of points: discount points and origination points.

 •Discount points:These types of points are really prepaid interest on the mortgage loan. Because, 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. The advantage to this type of point is that it 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.

The longer you keep the property financed under the loan with purchased points, the more the money spent on the points will pay off. Accordingly, if the intention is to buy and sell the property or refinance in a rapid fashion, buying points is actually going to end up costing more than just paying the loan at the higher interest rate.

There are many different factors that will effect whether or not you pay points as well as how many. The amount of money you have to put down at closing as well as how long you plan on staying in your house can be a factor. If you plan to stay in your home for a while, it may be worth reducing the interest rate by paying points. Be sure to have your lender carefully explain these fees if you have any questions.

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