What are Mortgage Points?

Saving enough money for a down payment and closing costs can be daunting enough, and then you are told buying mortgage points will lower the interest on your loan. Many questions are going through your head: What are mortgage points? How much do they cost? Should I lower my down payment to buy them? We will take a look at different types of mortgage points, and when it makes sense to buy them.

What are Mortgage Points?

There are two types of mortgage points: origination and discount. Both types are fees paid directly to the lender at closing. One point is typically equal to 1% of the loan. So, if your loan is for $250,000, one point is equal to $2,500. The Loan Estimate, received a few days after applying for a mortgage, lists mortgage points, so they will not come as a surprise. Points will also appear on the Closing Disclosure, received a few days prior to closing.

Origination Points

Origination points are fees that go to the lender for processing the loan. Not all lenders require origination points, and many that do are often willing to negotiate. New England Home Mortgage will go over how many origination points each lender charges so that you can choose a lender who works best for you.

Discount Points

Discount points are also fees paid to the lender, but these are in exchange for a lower interest rate for the term of the loan. For most lenders, the purchase of each point lowers the interest rate by .25%. So, if you get a loan with 5.5% interest and buy two discount points, your interest rate will lower to 5%, in turn lowering your monthly payments.

Should you purchase Discount Points?

Lower monthly payments sounds like a great deal, but it is important to look at the numbers to determine if it is right for you. First, you need to consider how long you will be staying in the home.

Let’s take a look at this example for a $300,000 loan with a 20% down payment:

In this example, the lower interest rate creates a monthly savings of $74.32. When you divide this number into the amount you paid at closing, you get the number of months is will take to break even:

$6,000  $74.32 = 80.73

So, it would take 81 months, or close to 7 years to get back the $6,000 you spent upfront. If you stayed in the home long enough to pay off the mortgage, the total payment savings on a 30-year fixed rate mortgage would be $26,755.20.

You can see that how long you plan to stay in the home is a key deciding factor as to whether or not you should buy discount points. It is also important to determine whether or paying for discount points will alter your down payment. Be sure to review all options carefully with your mortgage professional when making your decision.