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What are points?

Points are mortgage interest fees paid up front. This one-time fee reduces the initial interest rate on your home loan. Points are a percentage of your loan amount, with one point being equal to one percent of your loan.

As an example, if you borrow $200,000, one point would be equal to $2,000. In general, paying this up front will reduce your interest rate by approximately .25%.

When should I pay points?

Paying points lowers your interest rate, so it's always a good idea to pay them if possible, correct?

Not necessarily. Think of points as prepaid interest. Since paying points will lower your monthly payments, the longer you stay in your home, the more you will enjoy the benefits. But unless you plan to stay there more than four years, you won't recoup the amount.

Points may allow for greater tax deductions

If you are purchasing a home, the amount of your points is generally deductible in the year you buy. This is true even if the seller is paying for them. Keep this in mind while buying a new home.

Home Buyer Tip

Use your home equity to reduce debt and taxes

If you're running balances on credit cards, you cannot deduct the high interest you're currently paying. But a home equity loan may offer much lower interest rates and it's tax deductible, which may save you even more. (Consult your tax advisor for details.)

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