What are points on a home loan?


Talking about discount and origination points may start one to worry about what are points on a home loan.

Points are nothing but percentage of the home loan. One point equals 1 per cent of the mortgage amount. There are certain loan-related costs that come as points on a home loan.

What are discount points on a home loan?

Discount points are percentage of the loan amount paid upfront by the borrower to buy down their rate. For example, if you are considering a $300,000 loan at 6.25% for 30 years paying $3000 upfront may get you rate reduction down to 6.125%. Buying discount points is sometimes recommended as it reduces the overall Interest Cost (IC) of the loan in the long run. However, buying discount points is not always advisable and you may need to talk to a broker to see if it is applicable in your case.

Discount points are not the only points on a home loan one should know of. There are also broker/lender fee and the origination fee that also can be calculated in points. Points on a home loan are tax deductible when they do not include any other loan related costs beside discount and origination points. There are also other rules that apply when calculating tax deduction on mortgage points. Contact a tax professional if you want to be precise about this.

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