ASK THE FOOL

Paying Points

Q. Can you explain what mortgage “points” are? – S.H., Mobile, Alabama

A. A point is 1% of a home loan. So if you’re borrowing, say, $300,000 to buy a home, one point would be $3,000. You’re most likely to run across “discount points,” which are points you may choose to pay in order to lower your loan’s interest rate. Doing so will shrink the total interest you’ll pay over the life of the loan and reduce your monthly mortgage payment.

It’s often not worth paying points if you’re not likely to stay in the home for many years, or if you have an adjustable-rate (not fixed-rate) mortgage. If you pay, say, $6,000 in points to lower your rate but then sell the home three years later, you likely won’t have saved enough to offset that $6,000 cost. And points paid on adjustable-rate loans usually affect only the initial rate, saving you less in the long run. Points paid to reduce your interest rate are generally taxdeductible, but you can only deduct them during each year in which you would have paid that interest.

You may also run across “origination” points, which are fees charged by some (though not all) lenders for work done on your mortgage. They’re not tax-deductible.