Residential Mortgage Application: Considering Mortgage Points

When you are filling out a residential mortgage application, one thing that you may need to consider is paying mortgage points. Here are the basics of mortgage points and how they work.

Discount Points

One type of mortgage point is the discount point. Discount points are points that are paid to the lender in order to reduce the amount of interest that is charged on a mortgage. This is basically like pre-paying a portion of the interest that is going to be paid on the mortgage. This can be beneficial if you have extra money and you want to lower the amount of your monthly mortgage payment. Typically, one point is going to be equal to one percent of the value of the loan. When you pay these points, you can actually deduct the amount that you pay from your taxable income when you do your taxes.

Origination Points

Another type of mortgage point is the origination point. This type of mortgage point does not reduce the amount of interest that is going to be charged on your mortgage. This is simply part of the closing costs that is paid to the lender. These points are traditionally negotiable as well.

Prepaid Interest

Prepaid interest is an expense that is often incurred when an individual gets a new mortgage. Prepaid interest is the amount of interest that you will have to pay the mortgage lender before you actually make your first mortgage payment. For example, if you close the mortgage loan in the middle of the month and your first mortgage payment is due on the first day of the following month, you will pay a prorated amount of interest to the lender for the time in between. Loan points are also considered prepaid interest, according to the IRS.

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