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.
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, or is it?
Think of points as prepaid interest. Paying points will lower your monthly payments, so the longer you stay in your home, the more you’ll 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’re 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 when buying a new home.