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

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 24th Nov, 2007 07:03am
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.
Posted on: 24th Nov, 2007 07:03 am
Please explain what points are for.
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