What Are Mortgage Points?

Mortgage points are fees paid to a lender at closing in order to lower your mortgage interest rate. One point represents 1% of the face value of the mortgage loan. For example, for a $100,000 loan one discount point equals $1,000. One can associate points to the charges levied by a lender or the income earned by the lender. By paying mortgage points upfront, the lender receives the income at closing rather than over the long term as you pay your loan. In exchange, you benefit by getting a lower interest rate.
 

You can choose to pay discount points to lower your interest rate. Generally, each discount point paid on a 30-year loan typically lowers the interest rate by 0.125 percent. That means a 6.5 percent rate would be lowered to 6.375 percent if you purchase one point. The general rule of thumb is the longer you plan on staying in your home; the more advantageous it may be to pay points. If you have the cash, it's a good way to save money on interest over the life of your loan. However, as in any investment decision, you need to consider the opportunity cost of paying for points over other investment opportunities. In a low interest environment, this consideration is critical.

Tax benefit is another reason to pay for mortgage points. Points paid for residential real estate are tax deductible in the year they are paid. Buyers may deduct the amount paid even if the seller pays for the points at closing.

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