What Are Mortgage Points?
By Liz Clinger Updated on 10/9/2013
What are points?
Good question. The term "point" refers to a lender fee. One point is equivalent to 1% of your mortgage loan. If mortgage points sound tricky, it’s because they can be. It is best that you are prepared to ensure the lowest interest rate and prevent unexpected closing costs. Let’s begin by defining the two types of mortgage points and how they will affect your loan.
Origination Points
These are percentage based fees on the total cost of the mortgage loan. These fees may be applied in addition to the loan rate.
Example: A fee of 1 point on a $400,000 mortgage loan is $4,000. (400,000 x 0.01 = 4,000)
Discount Points
A discount point is prepaid interest. These are percentage based savings on the total interest owed. Lenders offer this as an incentive to pay more at the time of purchase in return for getting lower interest rates during the lifetime of the loan.
Both Origination and Discount Points are included in the APR (Annual Percentage Rate) which should also be disclosed when obtaining your stated loan rate. The APR reflects the total cost of borrowing over the life of the loan.
How do Mortgage Points Affect My Loan?
Origination Points
Discount Points
Before you pay any discount points you will want to consider how long you will be in the home (or have your mortgage) and compare it to the "break-even" period of the points paid. You can ask your mortgage professional or find Points Calculators on the internet to help you calculate this information. If your break-even period is seven years but you intend to have your mortgage for only five years, you may want to re-consider the purpose of paying points.
Now that you understand mortgage points, you will be prepared when you negotiate fees and discounts with your lender. Consider your best interests and discuss the alternatives with your lender.
What are points?
Good question. The term "point" refers to a lender fee. One point is equivalent to 1% of your mortgage loan. If mortgage points sound tricky, it’s because they can be. It is best that you are prepared to ensure the lowest interest rate and prevent unexpected closing costs. Let’s begin by defining the two types of mortgage points and how they will affect your loan.
Origination Points
These are percentage based fees on the total cost of the mortgage loan. These fees may be applied in addition to the loan rate.
Example: A fee of 1 point on a $400,000 mortgage loan is $4,000. (400,000 x 0.01 = 4,000)
Discount Points
A discount point is prepaid interest. These are percentage based savings on the total interest owed. Lenders offer this as an incentive to pay more at the time of purchase in return for getting lower interest rates during the lifetime of the loan.
Both Origination and Discount Points are included in the APR (Annual Percentage Rate) which should also be disclosed when obtaining your stated loan rate. The APR reflects the total cost of borrowing over the life of the loan.
How do Mortgage Points Affect My Loan?
Origination Points
- Seek mortgage lenders with lower origination points for lower mortgage loan costs.
- Each point will raise the total cost by including the fees charged.
Discount Points
- Each point paid will usually lower the interest rate on your loan by .25% (e.g., 1% discount points may lower your rate from 4.50% to 4.25%).
- Paying more upfront will earn you more points to reduce the overall interest owed.
- You will enjoy monthly savings over the life of your if you pay money upfront today.
Before you pay any discount points you will want to consider how long you will be in the home (or have your mortgage) and compare it to the "break-even" period of the points paid. You can ask your mortgage professional or find Points Calculators on the internet to help you calculate this information. If your break-even period is seven years but you intend to have your mortgage for only five years, you may want to re-consider the purpose of paying points.
Now that you understand mortgage points, you will be prepared when you negotiate fees and discounts with your lender. Consider your best interests and discuss the alternatives with your lender.