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Mortgage Points

Anybody who has ever purchased a home, or compared quotes on a mortgage to find out the cost, has likely heard of mortgage “points”. Even though it might seem a little abstract, the concept is actually quite simple. Mortgage points describe charges or a percentage that must be paid to the lender in order to obtain a mortgage on a home. You should also be aware that there are two different kinds of mortgage points -- discount points and origination points. Lenders charge different amounts for mortgage points, so it would be effective to shop around and find the one that suits you.

Discount points refer to the amount of money paid to the lender in order to obtain a loan at a specified rate of interest. Mortgage points are like prepaid interest rates that you will take out for a new home, with each point equaling one percent of the total amount of the loan. Each point will then lower the interest rate by some amount, however you’re usually limited to purchase up to four points. The number of points you’re allowed to purchase will depend upon how much the lender wishes to lower his or her interest rate. These points are also paid at closing and are tax deductible.

Origination points are used to pay for the costs of the loan in the first place. These points do not provide you with any valuable benefits and are not tax deductible. You are better off trying to get a loan that doesn’t require these kinds of points.

The decision to purchase mortgage points depend on a few key factors: the length of time you wish to live in your home, and the amount of down payment you will be making. One who decides to live in their home for many years would benefit from obtaining discount points because the points will lower the interest rates for long term.