A point is equal to one percent of a mortgage loan amount. Loan fees may be quoted in points or in flat dollar amounts. “Discount points” are different. They are paid by borrowers who wish to get a lower than market mortgage rate.
A point is equal to one percent of a mortgage loan amount. Loan fees may be quoted in points or in flat dollar amounts. “Discount points” are different. They are paid by borrowers who wish to get a lower mortgage rates.
Discount points allow borrowers to “buy down” their mortgage rate. Discount points may also be referred to as “prepaid interest” because the borrower is paying upfront to have a lower interest rate and payment for the duration of the loan.
For example, a $100,000 30-year mortgage at a 4.25 percent interest rate might cost $2,000 in loan fees. By paying an additional two discount points at a cost of $2,000, the borrower might get a 4.00 percent interest rate.
It only makes sense to pay discount points when the borrower knows that he or she will keep the property and its mortgage long enough to recoup the additional costs.
Points may be tax-deductible, depending on your situation. Check with a tax adviser.
Sometimes lenders add points or fees to cover some of their costs. These are generally called origination points. They can increase the cost of your mortgage. You have the right to challenge fees that seem too high.