Homebuyers who are doing research and shopping around for mortgage financing, will often receive quotes from lenders that include both loan rates and "points." Many people and especially first time homebuyers are confused as to what exactly what is a point?
Simply defined, a point is a fee equal to 1 percent of the loan amount. For example, A 30-year, $200,000 mortgage might have a rate of 6 percent, but come with a charge of 1 point, or $2,000. A lender can charge 1, 2 or more points. There are two kinds of points: discount points and origination points.
•Discount points:These types of points are really prepaid interest on the mortgage loan. Because, the more points you pay, the lower the interest rate on the loan and vice versa. Borrowers typically can pay anywhere from zero to 3 or 4 points, depending on how much they want to lower their rates. The advantage to this type of point is that it is tax-deductible.
•Origination fee: This is charged by the lender to cover the costs of making the loan. The origination fee is deductible if it was used to obtain the mortgage and not to pay other closing costs. The IRS specifically states that if the fee is for items that would normally be itemized on a settlement statement, such as notary fees, preparation costs, and inspection fees, it is not deductible.
Of course there are many different factors that will effect whether or not you will be required to pay points. The amount of money you have to put down at closing as well as how long you plan on staying in your house can be a factor. Keep in mind, if you plan to stay in your home for a while, it may be worth reducing the interest rate by paying points. If you are confused on anything, be sure to have your lender carefully explain these fees if you have any questions.
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