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The offbeat personal finance blog for responsible people.

What are Mortgage Points?

By Len Penzo

Readers: This is article 3 of 25 from my no-nonsense “Mortgage Basics” quick-reference series.

mortgage basicsMortgage points — commonly referred to as simply “points” — are the fee that a borrower pays to the lender for a lower interest rate; one point equals 1% of the loan amount. Points are also tax deductible.

Homebuyers can typically reduce their mortgage interest rate by as much as 0.25% for each point they purchase. Generally speaking, lenders will let a borrower pay for no more than four points.

The decision to buy points and if so, how many — usually depends on the following two criteria:

How much you have for the down payment

Points may not be a good idea for homebuyers who may have trouble coming up with the cash necessary to meet the loans minimum down payment, or make the 20% down payment threshold necessary to avoid paying private mortgage insurance.

How long you plan to stay in your house

In most cases, it makes sense to buy points if you plan to stay in your house over a long time period. Thankfully, there are web-based calculators available to help you determine and optimize your break-even point based upon the length of time you expect to live in your home and the number of points you want to purchase.

Photo Credit: GotCredit

January 8, 2016

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This site is for informational and entertainment purposes only, and the content herein should not be mistaken for professional financial advice. In fact, making investment decisions based on information published here, or any other website for that matter, is more than unwise; it is folly. This website accepts advertising in the form of monetary and other compensation; as such, topics of discussion are occasionally influenced by these advertisers. Sometimes, an article may also include affiliate links, meaning, at no additional cost to you, this blog earns a commission if you click through and make a purchase (for example, as an Amazon Associate I earn from qualifying purchases). Remember, you and you alone are responsible for the decisions you make in life, so please contact an independent financial professional for advice regarding your unique personal situation.

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