Mortgage Refinance Guide

Mortgage lenders often quote interest rates based on points paid upfront. What are points, and how do they work?

A point is a fee that amounts to one percent of the total mortgage amount.  There are discount points and origination points; origination points are fees that vary by lender.  Some lenders may quote you based on one point; other lenders may quote interest rates based on three points.

Discount points are prepaid interest on the mortgage paid at closing.  You are paying the fee in exchange for a lower interest rate.  Many lenders allow you to choose an interest rate based on paying a certain number of points.  There is a limit to the number of points you can pay upfront; this limit is typically four points. One advantage of paying this fee is you can claim a tax deduction on your Income tax.

Origination fees are charged by the lender as an expense for processing your loan.  These points are not tax deductible and have no benefit for you.  If you can negotiate with your lender to drop the origination fees you could save yourself money at closing.

The decision whether or not you should pay points up front depends how long you intend to keep the property.  If you plan on moving or refinancing you will not save money by paying upfront.  If you are going to keep the mortgage for a long duration you could save in the long run by getting a better interest rate.