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What are Mortgage Points?

written by: Lucinda Watrous•edited by: Jean Scheid•updated: 6/28/2011

Mortgage points are a part of every mortgage. Knowing what kinds of points there are and what each of them means to your loan will make a big difference when you are shopping for the best deal. Keep reading to find out the answer to the "what are mortgage points?" question.

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    What are Mortgage Points?

    There are two different kinds of mortgage points presented in each mortgage. One has a benefit to the borrower, and one doesn't. Understanding the difference between the two types of mortgage points is very important for all home buyers. Paying points is an option and helps to negotiate the loan terms, but if you don't know what you're paying, you're not going to do a good job at negotiating.

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    Discount Points

    Discount points are the most beneficial mortgage points to the buyer. If you have a substantial amount of cash on hand up front, but do not have the credit to get the interest rate you want, paying for points may be the best way to go. A discount point represents 1% of the overall loan amount, and for each point you pay, the lender will reduce your interest rate by 1/4 of a percent. Most lenders will let you buy 3 or 4 discount points, reducing your interest rate by no more than 1%. For example, if your loan amount is for $300,000, each point will cost $3,000. Paying four points will cost you $12,000. If your interest rate was 6%, your monthly payment would be $1798.65. After the buy down, your interest rate is 5%, which makes your payment $1610.46, saving you $188.19 per month. At this rate, it would take nearly 64 months, or slightly longer than 5 years to make the $12,000 buy down back. If you do not think you will be in the house at least that long, don't pay for the points up front. These points are tax deductible.

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    Origination Points

    These mortgage points are what the lender uses to make money. They will vary from lender to lender and will do the borrower no good. These points include costs for things such as home inspection, appraisal, credit report and other processing and approval fees. Some lenders may allow borrowers to pay origination points, while others will factor them into the cost of the overall loan. When shopping for lenders, discuss their policies and costs of origination points. It is important to note that origination points are not tax deductible.