In the mortgage business the mortgage broker or lending company or the credit union or the mortgage company from which one gets a mortgage may be offered points. But what are mortgage points that a borrower can buy? Here is a brief mortgage points explanation. Mortgage points are paying a certain amount of money up front for reducing the interest rate that will be applied on a mortgage loan. Assuming that the mortgage broker offers 1 point at $ 1000 for a reduction of .025% in the interest rate on a fixed rate mortgage and .375% on an adjustable rate mortgage the borrower may decide to buy 1 point by paying $1000 and getting the interest reduced from 6% to 5.975% on a fixed rate mortgage. There are two types of points that are offered by mortgage loan officers which are originating points and discount points. Originating points are what the loan officer charges for getting the mortgage loan processed and this varies from loan officer to loan officer. Discount points are the points one buys at the time of the closing of the mortgage to reduce the monthly interest that one will be paying on the loan. In USA the charge per point is currently $ 1000 and the calculation of the originating points and the discount points is the same.

There are point calculators which are freely available on the Internet that one can use to see if buying points for a mortgage are feasible or not. The payment for purchasing points is done immediately and the saving on the interest will be over the entire period of the repayment of the loan. So one has to be careful before deciding whether to purchase points or not. Some loan officers also offer to sell points. This works in reverse for example if one is taking a 30 year fixed rate mortgage at 6.28% and the loan officer offers to buy 2 point the interest rate will be raised to 6.33% assuming that each point is worth .025%. If a borrower is short on cash only then should they buy points because they will be paying the extra interest for the entire term of the loan.

Understanding mortgage points is not easy as one has to look at the fact that they are paying hard cash to buy points and hope to pay lesser installments for the life of the mortgage loan. But will this really prove to be beneficial? There are arguments between financial analysts about the benefits and the pitfalls involved in buying points. So whether a borrower decides to buy mortgage discount points or not the borrower needs to fully understand the benefits or loss that he or she will incur if they buy points.

Some people think that they should buy mortgage points for second home as they will pay a lesser amount in the monthly installments however one should remember that points bought for a second house are not tax deductible. There are discount points calculators which even show a comparison of what one would be paying in installments without discounts and with discounts. All one needs to do is look at their current and projected cash flow before deciding to purchase discount points. There is a cap on the number of points that one can purchase and different lenders have different policies regarding the sale of points. One may offer them for a 15 year fixed rate mortgage and the other for a 30 year fixed rate mortgage so there is no hard and fast rule of what the lender offers.

Some people want to know are mortgage points tax deductible. The answer is that yes they are tax deductible as long as certain conditions are met. The rate that one paid for the points is the general rate for points in the area. The money to pay was not borrowed from the lender or the mortgage broker; the points are shown cleanly and not as other charges like attorney’s fees, etc. The mortgage was used for paying or reconstruction of the main house and not for a second house.