Mortgage points are a fee that is paid when you take out the loan. You may be required to pay a number of points as an origination fee, as closing costs, or as part of the down payment. Knowing which points are optional and if you should choose to pay them can save you thousands of dollars over the life of the loan.
Cost of Points
Each mortgage point represents 1 percent of the amount of the mortgage; so one point on a $130,000 mortgage represents $1,300, two points represents $2,600, and so on.
Origination points are those that are associated with taking out the loan and are not optional. Discount points are optional and can be paid to reduce the interest rate on the mortgage. Each discount point you pay lowers your interest rate by about a quarter of a percent.
Calculating Break-even Point
To calculate whether or not discount points are worth paying, ask your lender how much each point will reduce your monthly payment, then divide the cost of the points by that number. For example, if you would save $50 per month by paying for one point which cost $2,000, it would take 40 months to break even.
Video of the Day
Should You Pay for Discount Points?
After you have calculated your break-even point, consider how likely you are to keep your mortgage. If you plan to get a new mortgage or refinance before the break-even point, you should not pay for the points. If you plan to keep the loan for much longer than the break-even point you should strongly consider paying the points.
Most points are tax deductible. If you are taking out a mortgage, you can deduct the points when you pay them. If you are refinancing your loan you must to take the deduction over the duration of the mortgage.