A few terms associated with a second mortgage loan can seem somewhat esoteric. Advertisements for various lending institutions can sometimes be hard to translate. For example, many consumers find themselves wondering what, exactly, is meant by the term “points”

In the context of a mortgage loan, “points” refer to a percentage of the mortgage loan, usually one percent, which you pay to the lending institution in exchange for a lower interest rate. If your second mortgage loan is in the amount $150,000, for example, you would typically pay $1,500 for each point. Thinking of a point as being pre-paid interest, which is how it is viewed by the lending institution, is a good way to understand the concept.

Depending on the term of your loan, and other considerations specific to individual situations, this may be a good idea for you. Be sure to consultant with your tax advisor or the Internal Revenue Service about whether you can deduct the cost of points from the amount of your total taxable income for the year. Remember, when it comes to income tax, each situation is different and, therefore, you must be sure you qualify before assuming you can take any deduction.

Some lenders will use points to try and get you to pay unnecessary fees. If your loan officer does not clearly explain the specifics about how purchasing points will impact your second mortgage loan and the associated costs, request clarification or take your business elsewhere. Remember, a reputable lending institution is interested in partnering with its customers, not pulling the wool over their eyes. A good member of the banking community knows the value of an informed consumer.