What are points in the context of a loan?

In the context of a loan, points refer to loan-origination fees that are typically expressed as a percentage of the total loan amount. When a borrower pays points, they are essentially prepaying some of the interest on the loan in exchange for a lower interest rate over the life of the loan. This arrangement can be financially beneficial for the borrower if they plan to hold the loan for a long period because it can reduce their monthly mortgage payments.

These points are often considered deductible as mortgage interest on a borrower’s tax return, provided certain conditions are met. The potential deduction can make paying points an appealing option, especially for those looking to lower their tax liability and interest costs in the long term.