Mortgage Points

Mortgage Points are an upfront charge the lender places on a mortgage to reduce the interest rate charged the borrower.  Mortgage points are paid at the time of closing and are usually stated as a percentage of the loan amount.  For example, a $100,000 mortgage at 6.0% and 3 points would require the payment of $3,000 at closing.

Since points are a form of prepayment on a loan, they are used to reduce the risk and therefore interest rate charged to the borrower.  Since mortgage points are a prepayment of interest on a loan, they are a deductible expense on federal income taxes.

Points are included in the calculation of APR, which can be used to compare loans.  The relationship between APR, points and interest can be seen in the following example for a 30 year fixed rate mortgage:

The borrower should keep in mind that points are used to reduce interest payments over the entire lifetime or term of the loan. If the homeowner knows they are moving or refinancing a loan in just a couple of years, most of the benefit of the points is lost as is the money paid for the points.