When you’re preparing to purchase a house or refinance your current mortgage, you’ll hear the term “points”. This is a term that describes charges that you’ll pay to the lender. There are two different types of points – origination points and discount points.

Origination points are strictly an expense to obtain a loan to cover the lender’s expenses. There is no benefit for the borrower, plus these charges are not tax deductible. Therefore, it is in your interest, as a borrower, to locate a lender – or a specific loan – where there is no charge for origination points.

On the other hand, discount points are paid to obtain a loan at a lower interest rate. Best described as pre-paid interest, it is equal to 1% of the total principal amount of the loan. If you’re borrowing $150,000, each point will cost you $1500. Each point purchased will lower your interest rate. Either the buyer or the seller can pay the points, and it is not uncommon to share or split this fee. These dollars are tax deductible as home mortgage interest if itemized on Schedule A of your Form 1040.

So how do you decide whether to purchase points? How long you plan to remain in this house is a key issue, because you’ll need to figure if the savings in interest will offset the up-front payment.

A professional mortgage lender who has your best interest in mind will help you with the calculations and guide you in the right direction.