The structure of home mortgages varies around the world. Paying for mortgage points is a common practice in the United States and, at least according to anecdotal evidence, it may be a uniquely American approach to home financing. In this article, we'll discuss the different mortgage points and how to make them work for you.
What Mortgage Points AreMortgage points come in two varieties: origination points and discount points.
In both cases, each point is equal to 1% of the total amount mortgaged.
For example, on a $100,000 home, one point is equal to $1,000.
Origination points are used to compensate loan officers. Not all
mortgage providers require the payment of origination points, and those
that do are often willing to negotiate the fee. Origination points are
not tax deductible.
Discount points are prepaid interest. The purchase of each point generally lowers the interest rate
on your mortgage by 0.25%. Most lenders provide the opportunity to
purchase anywhere from zero to three discount points. We will focus
mainly on discount points and how they can decrease your overall
mortgage payments. It is important to note, however, that when lenders
advertise rates, they often show a rate that is based on the purchase of
points. If you itemize your taxes, discount points are tax deductible on Schedule A.