Explanation of Interest Rate Points
Interest rate points are a cost paid by people taking out mortgages to help reduce the interest rate they pay on the loan.
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Function
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Each point you pay reduces your interest rate on the loan by approximately 0.25 percentage points, depending on the economic conditions.
Size
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The cost of each point depends on how much you are borrowing: Each point costs 1 percent of the value of the mortgage.
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Time Frame
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The mortgage points that you pay must be paid at the start of the loan, rather than over the term of the loan.
Considerations
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If you take the term of the loan to pay off the mortgage, the points could save you a significant amount of money. However, if your loan terminates early due to you paying it off, moving or refinancing, the points will not be refunded.
Tax Benefits
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When you pay for points on your first mortgage, you can deduct the entire cost on your taxes that year. With refinances or home equity loans, you must deduct the costs over the life of the loan on your taxes.
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