Points are fees that equal to a percent of the loan amount. One point equals 1% of the loan amount. Points include discount points (loan discounts) and origination points (loan original fee). Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon the completion of the escrow.
Origination points are fees charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan. They are often expressed as a percentage (e.g., 1%).
Discount points are additional money you can pay at closing. If you pay more points it will lower your interest rate. "In general, you can knock off about 1/4 to 1/8 of a percent off your interest rate for each point you pay," says Keith Gumbinger, vice president of mortgage information provider HSH Associates. The 1/4 to 1/8 percent savings to which Keith Gumbinger is referring is for a 30-year fixed-rate mortgage. The savings can be 1/4 - 1/2 a percent on a 15-year fixed-rate mortgage.
Because points are interest payments, they are tax-deductible in most cases, unless you are refinancing. In that case, points may be deductible, but only for residents of North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Missouri and Arkansas.
How long do you plan on keeping the loan?
Lower interest rates usually require you to pay closing costs and points. But, paying points can be good if you plan on living in the home for a long. The following from HouseBuyingTips.com shows the savings you can expect by paying two points on a $150,000.000 mortgage over the course of 30 years, assuming it's a fixed-rate loan.
Are you moving, or do you think you will need cash later on?
If you don't plan on staying in the home for long, paying points upfront won't benefit you. You may want to consider 100% financing through an 80-20 loan or other no-down-payment program. If you think you'll need cash later on, paying points upfront won't help you either because refinancing will replace your existing mortgage with a new one and you'll lose the savings of pre-paying the points.
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