Not sure what mortgage points are? Confounded by the concept of buying mortgage points? The following questions and answers will help you figure out what’s what in the world of mortgage points.

What are Mortgage Points?

Mortgage points are fees. Different lenders charge different fees, and you’ll find the amount charged can vary tremendously between lenders (which is why you’ll want to comparison shop before applying for a mortgage or refinancing). When brokers talk about points, they are usually talking about origination points and discount points, both of which are defined below.

What are Origination Points?

Origination points are exactly what they sound like — fees charged for originating (or refinancing) a loan through a lender. Most of the time origination points are set, flat fees. Your credit score will most likely affect how high or low your origination points (fees) will be. If you have excellent credit, the lender will feel safe offering you a loan with low origination fees. If you have awful credit, the lender will most likely charge you high origination fees, simply as self-protection. The lender has to protect itself against risky borrowers, and the origination points work as one of those protection mechanisms.

What About Discount Points? How do They Differ From Mortgage Points?

Discount points are points that you can pay to lower your interest rate on your mortgage. Not all mortgage brokers can offer discount points, but some brokers have the ability to offer you a lower interest rate for the entire life of your loan if you pay a certain percentage (buying points) up front. Exchange rates (what a lender charges for a point) vary over time and from lender to lender.

Most of the time when realtors or mortgage brokers discuss “mortgage points,” they are actually talking about discount points. While mortgage points can technically be any fees charged to borrowers, discount points are the fees that will lower the interest rate applied to your loan. From this point forward in this article, you can assume that all “mortgage points” discussed are “discount points”.

Do You Have to Pay For Points Up Front?

Technically, you do have to pay for points up front, but many lenders will let you roll the cost of points into the amount of your mortgage (which will increase the size of your loan accordingly). Keep in mind that you will be charged interest on that money, which will increase your costs for buying points even more.

Do You Have to Pay For Your Points?

Sometimes you can get a seller to pay for the points for you, as a part of the bargaining process. A seller who is desperate to sell his home may be willing to pay points for you just to get the house off his hands.

Are There Any Tax Advantages to Buying Points?

Yes. You can count money spent on buying points as tax deductions  for the same year as the home was purchased. In fact, you can deduct the money a seller spent buying points for you—it is all part of the home purchasing deal and is considered a tax-deductible expense. Per usual, the tax laws surrounding this issue are a bit sticky. You may want to check out this government overview on tax benefits of buying mortgage points in order to fully understand what deductions are possible.

Is it Worth the Expense to Buy Points?

You’ll need to calculate out how much your monthly mortgage payments would be at the rate offered without paying points and what the amount your monthly mortgage payments would be at the lower interest rate after paying points. Find the difference between the two, then add in the amount you will pay for points if you plan on living in the home for the entire life of the loan.

If you don’t plan on staying in the home for the lifetime of the loan, take the amount you spent on points and divide it by the number you came up with when calculating the difference between the two monthly mortgage payments. The resulting number will tell you how many months you need to carry the mortgage before you’ll reap the benefit of buying points.

If that process sounds too confusing, use this  mortgage points calculator. The calculator can help you determine the breaking even point (how many months you’d need to keep the house to reap the benefits of buying points), how much buying points could cost and save you, and ultimately allow you to decide if you should or should not buy points.

Mortgage Points Conclusion

Only you can determine if buying points will enhance your home purchase plan. For more details on the advantages and disadvantages of buying points, check out this article on negatives and positives of mortgage points.