What are points?
In real estate, a point is an amount equal to 1% of the mortgage. A point on a $120,000 mortgage is worth $1,200, 2 points are worth $2,400 and so on. There are two types of points:
Discount points, which lower your mortgage rate by a certain percentage. When you buy discount points, you're paying interest up front in exchange for a lower interest rate on your mortgage. Because discount points are prepaid interest, they are deductible as mortgage interest on a main home or second property that's not being rented out.
Origination points, which are charged by the lender to cover the costs of processing the loan. Some lenders even throw in fees for appraisals, inspections, title, attorneys, notaries, and real estate taxes. Origination points are not deductible on non-rental property.
On rental property, discount and origination points are amortized (spread out) as a depreciation expense over the life of the loan.
Caution: Your lender may use alternative terminology for points, including mortgage points, loan points, loan origination fees, maximum loan charges, and loan discounts just to name a few. To further confuse the situation, they may even use misleading terminology, for example, "loan origination points" to describe what are actually discount points. If you don't know which category your points belong to, ask your lender for clarification.