Mortgage points are an important part of any home purchase. But if you have never purchased a home before, you may not know what the different types of points are and what they can mean for you. Here is a brief discussion of points and information you should know so you can make the best educated decision about your finances when buying a home.
Origination Points
An origination point is the term that refers to the fees that your lender receives during the loan origination process. The fee is for the work that they do for you by evaluating your credit worthiness, processing the paperwork and approving your loan.
Generally, one origination point is equal to one percent of the mortgage loan. For instance, if you are paying two origination points to your lender and your loan is for $100,000, you would be paying $2,000 to your lender to compensate them for the work that they are doing for you. When going through the mortgage borrowing process, ask about negotiating the origination points and you may be able to pay less money to your lender at closing.
Since every individual lender is different, it is possible that you might find one that does not even charge origination points. However, if you find a lender that advertises no origination points, it is possible that they have other hidden fees and charges that make up for that. That’s why it is so important to have a trusted advisor look at your loan documents before you agree to something you do not understand. You could end up paying thousands more over the term of the loan if you make the wrong decision.
Discount Points
Discount points are designed for buyers who want to pay lower mortgage rates for the entire term of the loan in return for paying an additional fee up front. In general, if you purchase one Discount Point, you could lower your fixed interest rate by as much as a quarter of a percentage point. For an adjustable rate mortgage, you can lower your mortgage rate by as much as 0.375 percent. Your particular lender may even allow more flexibility in the amount of the buydown so you may get an even bigger discount in some cases.
As an example, if you qualify for a mortgage rate of 5 percent and you buy 2 Discount Points, you could reduce your interest rate by as much as 0.75 percent so your new rate would be 4.25 percent. Each Discount Point typically costs the equivalent of one percent of the total loan value. This means that if your mortgage loan is $100,000, each Discount Point would cost you $1,000. So in order to reduce your interest rate by 2 points on a $100,000 loan, you would have to pay $2,000 up front.
One of the benefits of paying Discount Points is that you may be eligible for a tax deduction if you itemize on your yearly tax forms. Schedule A of your 1040 IRS tax returns should have a section where you can enter the amount of Discount Points you purchased, but it is always best to work with a tax advisor or financial consultant when determining the amount of deductions you can legally take.
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