If you are a Central Illinois homebuyer who is requesting quotes from a lender for a home loan, you have most likely found that the quotes frequently include both loan rates and points. If you are like most people, you may be confused by what exactly a point is.

Mortgage points describe certain charges to be paid in order to obtain a mortgage on a home. Each mortgage point is a fee based on one percent of the total amount of the loan

A point is a fee equal to 1 percent of the loan amount. For example, A 30-year, $200,000 mortgage might have a rate of 6 percent, but come with a charge of 1 point, or $2,000. A lender can charge 1, 2 or more points. There are two kinds of points: discount points and origination points.

 •Discount points: These types of points are really prepaid interest on the mortgage loan Because, the more points you pay, the lower the interest rate on the loan and vice versa. Borrowers typically can pay anywhere from zero to 3 or 4 points, depending on how much they want to lower their rates. The advantage to this type of point is that it is tax-deductible.
 

Origination fee: This is a fee that is charged by the lender to cover the costs of making the loan. The origination fee is only tax deductible if it was used to obtain the mortgage and not to pay other closing costs. The IRS specifically states that if the fee is for items that would normally be itemized on a settlement statement, such as notary fees, preparation costs, and home inspection fees are not deductible.

The longer you keep the home financed under the loan that has the purchased points, the more money spent on the points will pay off.  And if the homebuyer has the intention to buy and sell the property or refinance in a big hurry, the buying points will actually end up costing more than just paying the loan at the higher interest rate.

Whether or not you pay points, or how many points can be effected by a variety of factors.  The amount of money that you can put down at closing and also how long you plan on staying in your home can be a factor. If you are planning to stay in your home for a long time, you may find it worth it pay points so that it reduces your interest rate.

The process can be confusing so make sure to have your mortgage lender explain these fees with you at length!

 

 

**