# Mortgage Points - What are the types and how do you benefit?

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Mortgage Points are what you pay for the lender's costs of making the loan. Points are also a kind of prepaid interest which can help you get a lower rate on your mortgage. Each point equals 1% of the principal loan amount.

### What are the types of mortgage points?

There are 2 types of mortgage points as given below:
• Discount Points:
Such points are prepaid interest which when paid helps you in getting a reduced rate of interest. The higher points you pay the lower will be your mortgage rate. You can pay up to 3-4 points on your loan depending upon how much you'd like to reduce the mortgage rate. Know more..

• Origination Points:
These points are charged by the lender as part of the costs in originating or processing the new loan. It may include notary fees, inspection costs, appraisal fees etc.

### Is paying points worth it?

If you're staying in the property for long, it makes sense to pay discount points. Calculate the break even period during which you'll be able to recover the points paid upfront. If your period of stay in the house exceeds the breakeven period, you'll be able to save by paying points.

Let's take an example:

Say, you have taken a loan amount worth \$200,000 at 8% rate with 0 points. For a 30 year fixed rate mortgage, the monthly payments will be \$ 1467.53. Now if you pay 1 point, the rate is reduced by 0.25%. So, you can get a lower rate as 7.75%. At the new rate, the monthly payments will drop to \$ 1432.82. So, the difference or your savings is \$ 34.71 per month.

you pay by your savings per month i.e by \$34.71

Number of months to recover the points (Break-even period) = 2000/34.71 = 57 months (approx.)

So, you'll actually start saving in interest, 57 months or 4 years and 9 months after you pay points. Thus, if you don't stay in the property for long, you won't save enough after the breakeven period is over. You may use the Mortgage Points Calculator to find out how much you'll save by paying discount points.

### Are mortgage points tax-deductible?

Discount Points are tax deductible only when you itemize your deductions. However, you need to fulfill certain criteria to deduct points on your purchase mortgage in the year they're paid.

However, if it's a refinance mortgage, then you can deduct points over the loan period. Know more on how to deduct points from the article on discount points.

Last updated on January 19, 2013

Latest Community Discussions
I have paid mortgage points and now I need to know whether or not these points are deductible when I pay taxes. Can anyone help?

posted on 2011-10-31 23:16:05
What are Mortgage Points, How They Work, and How Refinancing Affects Them?

posted on 2009-09-19 10:57:04
My mortgage broker is offering me a scenario where I pay for one discount point to lower my interest rate, and he'll also give me an ad...

posted on 2009-03-09 18:19:55
Please explain what points are for.

posted on 2007-11-24 07:03:32

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Joined: 24 Nov 2007
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 Post subject: What are points? Please explain what points are for.

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Joined: 15 Aug 2007
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Location: Minneapolis
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 Post subject: A point in mortgage terms is a value that is equal to 1% of a loan amount. When loan officers talk about points among themselves they are usually talking about how much fees they are charging for a particular loan. Example ( I am making 2 points on this deal = He is charging 2% of the loan amount to get the deal done ) When loan officer talking with lender points usually mean Yeld spread (points that a lender pays to loan officer for getting the deal done) When a loan officer talks about points with the client/borrower they are usually talking about the origination fee (points being charged from the client to get the deal done) Another form of points are discount points and these are paid by the borrower/client to the lender to reduce their interest rate on the loan. Most people seeking a loan today think that points is what is loan going to cost them which is incorrect. There are many ways to define points and their meaning. This is why any borrower should look at the bottom line and not the points. Any good salesman can present the points in a variety of ways to you. So try to go with someone you trust and don't concentrate on points as they are not the bottom line._________________Eugene Volovik Home Loan Consultant Countrywide 612-481-3127 Conventional, FHA and Commercial Lending in 48 states

Joined: 27 Jun 2007
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 Post subject: Hi carlark, Welcome to this forum. Points are also known as discount points. These are some kind of fees that the lenders charge at closing. If the borrower pays these points, he may be offered lower interest rates for the entire loan period. Eugene has given you some very good information regarding points and I agree with him that the buyer should look the net amount that they need to pay. Points are some kinds of baits to attract the buyers. There is an article regarding Discount points. You can check it out- http://www.mortgagefit.com/discount-point.html Feel free to ask if you have any further questions. Thanks, Larry
;)

Guest

 Post subject: How did you get 0.25%. , why ? 1 point, the rate is reduced by 0.25% thanks

Joined: 20 Dec 2005
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 Post subject: Hi Guest, This is a general practice among the lenders that if you pay 1 point your interest rate will be reduced by 0.25%. Thanks
Kevin Q

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 Post subject: Front & Back Point Would you please explain 1. what are Front and back point? 2. how does commision loan generate? Thanks,

Joined: 22 Oct 2005
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 Post subject: Welcome Kevin Q, Front end points are also known as loan origination fees. It is 1% of the total amount that you are borrowing for your home loan. They are used to counteract the interest rate that you will pay on your home mortgage loan. Back end points occur if you decide to enlist an assistant of a broker to find you a lender for your home mortgage loan. This will show up as yield-spread-premium._________________Procrastination is the enemy of your financial success

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Kevin Q

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 Post subject: Loan commission? Thanks Adonis and parmoney for your respomse. Who pay for loan commission to mortgage company any loan officer? How many % can you show me the calculation. Thanks you in advance.

Joined: 03 Oct 2005
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Location: New Jersey
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 Post subject: Hi Kevin Q As far as I know, a loan officer gets a commission from the mortgage company for his/her services. They are paid commission on the value of the loans they place. As the real estate market slows down, they often suffer a decline in earnings and may even be subject to layoffs. As far as your question is concerned, can you explain what are you trying to mean when you say "Who pay for loan commission to mortgage company"? Thanks._________________Good is the Enemy of Great.

Joined: 05 Dec 2008
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 Post subject: Example: Mr. Smith is buying a new house but needs financing to own it. He hires mortgage broker (who has several sales agents working for them) to secure favorable terms on the home loan. Mr. Jones (sales agent working for mortgage broker) qualifies him and charges \$5000 in fees for their services. Mr. Smith is happy with the program and agrees to move forward. A couple weeks later the financing is in place and it is time to close the transaction. Mr. Smith signs the final paperwork and provides funds for the \$5000 and the down payment for the house to escrow. Mr. Smith moves into his new home and the mortgage broker receives a check for \$5000. Now the sales agent (Mr. Jones) who is working for mortgage broker has an agreement in place to receive 40% of said commision. Mortgage broker cuts a check for \$2000 to sales agent.
linnyl

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 Post subject: points I purchased 1 3/4 points at a bank, then got a better offer from my current lender, I already had the appraisal with the bank. Can I get my money back for the points??

Joined: 20 Oct 2011
Posts: 6

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 Post subject: with discount points, how are the costs of each point calculated? Can you buy points on a fixed rate mortgage only or are they available on all types of loan? Do the prices change if you have a 20 year mortgage vs a 30 year fixed mortgage or are they basically a set amount?_________________Interested in a reverse mortgage or jumbo mortgage loan? Find a range of options in seconds.

Joined: 20 Dec 2005
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