What Are Points on a Loan?


Quick Answer

The term "points" refers to a fee that is charged when taking out a loan, generally a mortgage. One point is equal to 1 percent of the total amount of the loan. Two types of points are used when taking out a loan. These points are discount points and origination points.

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Full Answer

Discount points allow borrowers to prepay the interest on the loan. Borrowers have the option to pay up to three or four points, depending on the lender. The more points the borrower prepays, the lower the interest rate is. For example, if the interest rate is set at 6 percent, purchasing two points lowers the rate to 4 percent. This option can lower the amount of the monthly payment the borrower has for the life of the loan. Discount points are tax-deductible.

Origination points are fees that are charged by the lender. These fees cover the costs associated with making a loan to the borrower. Examples of these costs could include closing costs, notary fees, inspection fees or costs associated with preparing the loan. The only form of origination points that is tax-deductible is if the fee was used to obtain the loan. No other origination points are tax-deductible.

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