Mortgage Points, Explained

If you've applied for a mortgage before, you likely heard the lender reference rates and points. While most people are familiar with rates (the percentage of interest that must be paid on the loan annually), fewer borrowers understand how points affect their mortgage. Keep reading for a quick primer covering the basics of mortgage points and how they can benefit you!

To start with, it's important to remember that 1 mortgage point equals 1% of the total loan amount. This means that, on a $100,000 loan, each point equals $1,000, while on a $250,000 loan, each point equals $2,500. The number of points paid on a mortgage can be anywhere from 0, 1, 2, or even more. Furthermore, there are two distinct types of points: discount points and origination points.

Discount points are essentially extra money that you pay upfront to reduce the loan's interest rate. Typically, each discount point paid reduces your rate by 0.25%. Origination points, on the other hand, are fees charged by the lender in order to issue the loan. As you can see, both types of points are paid upfront, but for different reasons.

So how do you know if it's worth it to purchase discount points? It really depends on how much cash you have to work with and how long you plan on staying in the home. By purchasing points, you can reduce your monthly payment. Whether this is worth it depends on if you stay in the house long enough for the monthly savings to exceed the cost of the points. You can use an online mortgage point calculator to make the math easier.

Now that the mystery surrounding mortgage points has been cleared up, you can use them to your advantage on your next loan!