Mortgage points are certain charges to be paid in order to get a mortgage on a home. Each mortgage point is a fee based on one percent of the total amount of the loan. There are two different kinds of mortgage points-discount points and origination points-and each lender charges different amounts for each.
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Discount points refer to an amount of money paid to a lender to obtain a loan at a specific interest rate. These points are like pre-paid interest on a loan that a borrower takes out for a new home, with each point equaling to 1% of the total principal amount of the loan. For example, if a loan is for $100,000, one point is worth $1,000. Each point you buy will lower your interest rate by some amount. Borrowers can decide how many points they want to buy, but usually the limit is around four points. The number of points you purchase depends on how much you want to lower your interest rate.
Discount points are paid at closing, and, although buyers may not pay points on FHA or VA guaranteed loans, sellers can. On most mortgages, either the buyer or seller can pay the points; alternatively, the two parties can split the payment between themselves. An important feature of mortgage points is that they are tax deductible as a home mortgage interest if the deductions are itemized on Form 1040, Schedule A.