When you first shop for a mortgage, you’ll hear about points. You’ll quickly discover that lenders aren’t talking about the score of a big game. In the financial world, points are fees that cover loan processing or reduce interest rates.
One point equals 1% of the mortgage amount. For example, one point on a $100,000 loan is $1,000.
Let’s take a look at the two types of points that are applied to new and refinanced home loans: origination and discount.
Origination points are the easiest to understand; these are simply fees lenders charge to cover the cost of originating, processing and approving mortgage loans. Most lenders assess a fee to cover administrative costs. At Consumers, this is a flat fee vs. a percentage of the loan amount.
If someone says, “You can buy down the rate,” they’re referring to discount points. A discount point is a one-time fee that lowers your mortgage interest rate. The rate reduction stays in effect for the entire term of your loan. The more discount points you pay, the lower the interest rate.
You may also hear discount points as “prepaid interest.”
Generally, paying a point will lower your interest rate up to one-quarter of a percent, although the discount may fluctuate. This means if you have a 5% loan and you buy one point, your interest rate may be lowered to 4.75%. Buy two points and your rate may drop to 4.5%.
To see exactly how much an interest rate that’s one-quarter percent lower would affect your monthly payment, use our Mortgage Payment/Amortization Calculator.
Pay in cash or roll into the loan
Borrowers often pay for points in cash when they close on their mortgage loan. However, points can be rolled into the loan itself.
Deciding to buy points
Home buyers consider two factors when deciding if discount points are worthwhile:
- How long will I/we stay in this home? The longer you plan to stay in home, the more sense it makes to pay points.
- What is the “breakeven” point in the loan? Typically, this is when the cost of the up-front rate buydown is recovered by a lower monthly payment. This is expressed in months. Generally, less than 36 months to recover the discount cost is ideal.
- How much money do I/we have to put down at closing? You want to make sure you keep enough cash on hand for updates and repairs to your new home.
Get expert advice
You don’t have to figure out mortgage points alone! Our mortgage loan officers are here to guide you. Contact us online or call 800-991-2221 for help with determining when it makes sense to pay for points.
Consumers helps more than 1,000 members finance land, homes, and home improvement projects each year. When you need a mortgage or home equity line of credit, call us at 800-991-2221. We’re here to help you get the home of your dreams!