What Do Points Mean In Home Loans?

Points are fees that you pay when you close your mortgage. Some points are required, while others are optional.

Types

Origination points are required fees that you pay as part of the cost of initiating your mortgage. Discount points are optional fees that you choose to pay in order to reduce the interest rate on your mortgage.

Size

Each point you pay, whether optional or not, will cost about 1 percent of the amount of your loan. The charge for points does not change based on your credit score, down payment or value of the home.

Tax Benefits

When you pay points on your first mortgage, you can deduct that expense as an itemized deduction on your taxes. To claim this deduction, you must file using tax form 1040 and attach schedule A.

Should You Pay for Discount Points?

Whether or not you should pay for points depends on how long you plan to keep the loan and how much free cash you have at closing. If you need a low-cost closing, so you do not have to borrow money to furnish your home, you should take the fewest points. However, if you have extra funds, you should consider whether you will stay in the home past the break-even point.

Break-Even Point Calculation

To determine the break-even point, ask the lender how much money you would save each month on your payment if you paid for the points. Then divide the cost of the points by the monthly savings to determine how long you would have to keep the loan to break even. For example, if one point would save you $30 per month but costs $1,650, you would have to keep the loan for at least 55 months to break even.

References

• Bankrate: Mortgage Points
• IRS: Topic 504 - Home Mortgage Points
• Bankrate: Paying Mortgage Discount Points: A Primer