Understanding Points

One of the more confusing aspects of the loan application process is gaining an understanding of the concept known as “points”, term also referred to as mortgage loan origination fees or maximum loan charges.

Points are calculated based on the amount of the mortgage loan. They are equal to 1 percent of it. So for example if you want to buy a house that costs $230,000, one point would be equal to $2,300. This is looked upon by the lender as pre-paid interest. Therefore, paying points lowers the interest rate on your mortgage loan. This can be an attractive option for people who plan to stay in the same home for a prolonged period of time.

Whether or not this is a good choice for you depends on your particular circumstances, and can be a complex decision. Factors to take into account include how long you intend to own the home, and there are also tax considerations. You might want to talk to your accountant or another knowledgeable individual about the specifics of your scenario. Often you can deduct the points from your taxable income; however, there are certain conditions governing this type of deduction that affect if, how, and when you may legally take such cuts. Check with the Internal Revenue Service or a tax professional to make sure you understand exactly how paying for points will impact your tax situation.

Being aware of points and how they come into play when looking for the right mortgage loan can help consumers make the best choices. Never sign, or agree to, anything you do not understand. If a lender can’t explain something to your satisfaction, don’t do business with them. Esoteric terms like “points” can be daunting. That is why it is best to arm yourself with information.