One point is equivalent to one percent of the loan amount. Mortgage points are considered by the IRS to be a form of pre-paid interest. This means that mortgage points can be deducted from taxable income. Most lenders require that a borrower pay one or two points at closing time in exchange for a lower mortgage rate (lender's APR would stay the same).
Points are basically finance charges you pay the lender. One point equals 1% of the loan amount (for example, one point on a $75,000 loan is $750). The total number of points a lender charges depends on market conditions and the loan's interest rate.
When you pay "points," you pay interest in a lump sum upfront to get a lower rate on your fixed rate mortgage. Each point costs 1% of the mortgage amount. The more points you pay, the lower your mortgage rate. So, which is the best for you? More points and a lower rate? Or fewer points and higher rate? To decide, you need to consider:
(1) Whether you can afford to make the upfront payment now for points.
(2) The length of time expect to have the mortgage. The longer you plan to have your mortgage, the more it makes sense to pay for points now because you'll have a long time to benefit from the lower rate. Answer the questions below and we'll advise you on what's best for you.
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