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What are Points?

You may have heard it before. �Learn how to pay points on your mortgage.� What exactly are points, do you know? It is important to know all the options on your mortgage just so you can find the best deal for you. Points may be the best thing for you, but there really is only one way to find out. Here are some details on points, learn more so that they can help you.

A Point is�

The point is equal to the amount of 1 percent of the loan. If you have a mortgage of $200,000, then a point would equal $2,000. A lender can charge one point or two, even more if decided. Points are broken up into two different types.

Origination Points

This is when the lender charges you in order to cover the cost of making the loan. This is for all the fees that may occur during the process in the beginning. Notary fees, inspections fees and other prep costs would fall into this category. If the origination fee was used to help obtain the mortgage, but nothing regarding the closing costs, then it becomes deductible.

Discount Points

These types of points are often referred to as prepaid interest. Whenever you pay points, your interest rate lowers. Usually you can borrow up to 4 points, because these lower your rates, and often times your lender will not want your rate to lower too much. This is how they make their money. These are tax deductible.

How Many Points Should You Pay

You need to ask yourself some key questions. Mainly, how long do you expect to stay in this house? If you are only going to be there for a short time, then points are probably not in your best interest. Long term, however, you will want to cut down that interest. So paying point may work for you then. Points are different for different needs. Generally, if you want the lowest closing costs possible, then go with no points.

Points Work for You

Points are there for you to take advantage of. Use them if you want, do not use them if it does not work out. But make sure you know how your lender deals with points, and how it will come back to affect you.

National Rate Averages

Mortgage Rates

Product Rate
5/1 yr ARM 3.147%
1 yr ARM 3.299%
15 yr fixed 3.221%
30 yr fixed 3.815%

Home Equity Rates

* Updated Jun 8, 2012