- Each mortgage point equals 1 percent of the loan amount.mortgage image by hans slegers from Fotolia.com
There are two different types of mortgage points: origination and discount points. The origination point is the fee paid to the lender for completing the mortgage loan. In most cases, this point is predetermined and is a required fee. The discount point, however, is a different type of fee. A borrower pays discount points to get a lower interest rate. Discount points are not required and have positive and negative aspects. - If you pay discount points, you lower the interest charged on your mortgage--and that may mean tens of thousands of dollars of savings over the life of the loan.
- A discount point costs you 1 percent of the mortgage loan amount. But what have you gotten for that 1 percent? If your mortgage is for $300,000, one discount point would be $3000. If the discount means you are paying $100 less a month than you would be otherwise, or $1200 less a year, you would essentially be paying off that $3000 in 30 months. If you are planning to sell the house in two years, it would not be worth it to you to pay that discount point. But if you know you will be living there for three years or more (and are pretty sure that mortgage rates won't go down substantially), it will probably be worth your while to pay a point to get the discount mortgage rate.
- Discount points, as opposed to origination points, are tax deductible. If you itemize deductions on your 1040, don't forget to take that tax-deductible amount into account when you're considering whether to pay points to get a discounted mortgage rate. If the tax deduction from the points helps to significantly reduce your taxes, the tax savings will essentially lower the amount you have paid in points for the discount on your mortgage.
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