Calculating Mortgage Points

• A single mortgage point equals 1 percent of the loan value. For example, if you have a $500,000 mortgage loan, one mortgage point equals $5,000. Most mortgage loans give the borrower the option of purchasing multiple points, up to a maximum of four points. It is also possible to receive a mortgage loan without paying any points. To calculate the cost of multiple points, multiply the number of points as a percentage by the loan amount. For example, the cost of three points on a $300,000 loan equals $9,000.
  
  

Discount Points

• A discount point is a type of mortgage points charged by lenders that directly reduces the interest rate of the associated loan. Generally, borrowers will see a .375 percent reduction in interest rate for every discount point they purchase, but this number may vary slightly depending on the lender and type of mortgage loan. Discount points are also tax deductible. When making the decision to purchase discount points, it is important to consider how long you plan to keep the mortgage loan.
  
  

Origination Points

• Origination points are a type of mortgage points charged by lenders or mortgage brokers as a fee for originating the mortgage loan. Origination points are typically tax deductible, but don't directly reduce the interest rate of your mortgage. It is often possible to negotiate a mortgage loan that has no origination points. Because the fees charged by loan originators and mortgage brokers vary widely, it is important to get loan quotes from several originators or mortgage brokers.
  
  

Should I Pay Points?

• Paying points increases your mortgage closing costs. On a refinance loan, it is possible to pay points with equity from your house. On a purchase loan, you will typically have to pay points with cash on hand at closing. Therefore, you need to consider if you have the cash or equity to pay for the mortgage points. If you can afford to pay the additional closing costs, consider how long you plan to keep the mortgage loan. Since a mortgage loan with points results in a lower monthly mortgage payment, you can calculate how long it will take to break even paying for the mortgage points. If you can afford to pay for the points and you plan to keep your mortgage loan longer than the break even point, it generally makes sense to purchase points.