What are points?

A point is 1% of the amount of the loan. Two points is (are) 2% of the amount of the loan. A quarter point is 0.25% of the amount of the loan. Points are paid up front, to the lender, at the time the loan closes. In exchange for receiving some of his profit up front, the lender lowers the interest rate. Different lenders and different loan products have different formulas (formulae) for how much the rate is lowered by paying points.

As a general rule of thumb, it will take approximately five years to get back the dollars you have paid in points on a 30- year fixed rate loan. For example, a $400,000 fixed rate loan at 6.500% calls for a payment of $2,528.27. One point costs $4,000.00 and lowers the rate to 6.250%, and a monthly payment of $2,462.99. $4,000.00 divided by the difference in monthly payment ($65.28) equals 61.27 months. That's how long it takes to get your money back.

Any circumstance, which necessitates paying off the loan during this time, means that you leave money in the lender's hands. You have made an "investment" in the loan that takes over five years to get back. Paying points is always an option, but it is not necessary to pay any points to get a loan. There are plenty of loans and loan products available at zero points.

We always advise our clients to consult with a tax attorney, accountant, or CPA regarding any tax questions. As we understand the rules however, points paid for loans when purchasing a home are deductible in the year they are paid. Points paid in connection with a refinance must be spread over the term of the loan. (For example, 1/30th per year.) However, assume you have paid points to refinance two years ago and have therefore deducted only 2/30ths of the amount points you paid. If you now refinance, you can now deduct any amount you have not already deducted. Again, we emphasize that you should consult your tax advisor about these and any other tax questions.