Loan Points

When you obtain a mortgage, there are two forms of points you may pay: discount points and origination points. Each point is equal to 1% of your loan. This means a point for a $150,000 loan is $1,500.

Loan Origination Points

Origination points are actually mortgage loan officer compensation and they are not tax deductible. This fee is charged by the lender for processing a new loan application.

Option 1: $100,000 loan with a 6% rate and a $599.55 principal and interest payment.
Option 2: $1,000,000 loan with a 5.25% rate after paying 3 points ($3,000) with a $552.20 payment.

To break even in this example, you must stay in your house for 63 months.

Secondly, consider the cash reserves you have. It may not be wise to pay discount points if you will struggle with your down payment and closing costs for your loan.

Some experts will tell you that discount points are always worth it and a good investment, as most buyers simply want a home that will be affordable. Remember that buying points is usually worth it if you want the lowest payment and the most long-term savings, assuming you will stay in the home.

Keep in mind you are not allowed to pay discount points if you get a VA or FHA loan. However, the seller may have the option to do so.