Mortgage Points

When choosing a mortgage it's important to understand how mortgage points work as it is an important part of buying or refinancing a home. There are two types of mortgage points that all potential home owners should familiarize him or herself with. These are origination and discount points. Origination points are described as a type of fee that the borrower pays to a lender for their role in initiating and processing the mortgage loan. The amount a borrower pays in origination fees is based upon credit history and credit rating. It’s important to realize how origination points work and are calculated. Additionally, origination points are not tax deductible.

Discount points are a prepaid interest that is borrowed and ultimately lowers the amount of interest that will be paid on the entire mortgage. The amount of discount points you select will lower your interest rate and will play an important role in the amount you will ultimately pay in interest. It’s also good to understand how discount points work in regards to income taxes as your discount points are tax deductible if filed for the same year that you paid them.

Generally speaking, mortgage points are fees that are required by the lender. Speak to your lender about origination points as many of these are negotiable. Discount points can be used to buydown your interest rate and are a great way of ensuring that your ultimate mortgage loan remains affordable and stays within your budget. Those who are interested in buying a home may find that taking a free class regarding the home buying process (such as the type offered through local HUD agencies) can help you understand the benefits of using points to determine your overall mortgage payments. You may also find that by understanding how to use mortgage points to take deductions during tax time is another important strategy to good financial health. Always speak with a tax advisor to ensure that you understand which tax deductions you qualify for.

It’s important to understand that not every lender charges points on a mortgage and you should look around and compare different prices from various lenders. Some lenders decide not to charge origination points on your mortgage but the majority of lenders will charge discount points. The way a lender determines the amount of mortgage points varies as well, so ensure that you perform your homework and choose the lender with the terms that best meets your financial needs and situation.

Both origination and discount points are equivalent to 1% of the amount mortgaged. Ensure that you understand that origination mortgage points are given to the lender and discount points are applied to your mortgage loan. Before deciding which mortgage is best for your needs, you’ll need to decide whether or not to pay for mortgage points. Those who choose to live in a home for a long period of time may find that by purchasing discount points they can ensure they have a lower monthly payment each month.

Speak to a housing counselor before purchasing a home regarding the importance of mortgage points and the benefits of each. Those who plan on flipping a home may find that it is not beneficial to purchase discount points and may choose to bypass these entirely. If you are interested in obtaining tax credits for your mortgage points then make sure to speak with a professional who will help ensure that you file your taxes the correct way. There are many tax advantages available to new homeowners as well as those who decide to pay for discount points. Take the time to do your research and speak to a professional regarding any questions that you might have. Understanding how mortgage points work is vital for ensuring that you get the best deal possible.