In addition to the loan itself, a mortgage comes with other closing costs, such as an origination fee and discount points, notes Bankrate. Purchasing a house also leads to inspection fees, notary fees, loan preparation costs and a host of other items.
When potential homeowners are shopping around for a loan, the quote that they receive from a lender frequently includes an effective interest rate as well as a number of points. A point is a fee that equals 1 percent of the loan amount. A borrower might apply for a 30-year, $120,000 mortgage that would come with an interest rate of 5 percent but also includes a charge of two points, or $2,400. Lenders can charge as many points as they want, as stated by Bankrate.
Points come in two varieties: discount points and origination points. Discount points consist of prepaid interest on the mortgage itself. Borrowers can pay more points and reduce the interest rate of the loan. By paying as much as three or four points up front, they reduce their rates. These points are tax-deductible, according to Bankrate.
Origination points are the lender's way of covering the costs associated with providing the loan. If the origination fee is just going to get the mortgage rather than to pay other closing costs, it is deductible as well. However, if it goes to things that would normally appear individually on a settlement sheet, such as inspection and notary fees, it isn't deductible, reports Bankrate. Knowing these items helps the borrower shop more wisely for the best loan.