Learn
- Share:
-
-
-
-
What are Mortgage Points?
Mortgage points are fees that you pay to the lender at closing. Points are paid in addition to your down payment and closing costs. There are two types of mortgage points — origination points and discount points.
- Origination points (also known as origination fees) are fees that cover some of the lender's costs for providing your home loan. Each origination point costs 1% of the loan amount. The number of origination points you are charged will vary with every mortgage loan. Ask your lender for more details.
- Discount points are different. They offer a way for you, the buyer, to prepay some of the interest on your home loan. With discount points, you pay an upfront fee in exchange for a lower interest rate on your loan. Purchasing one discount point will lower your overall loan interest rate by a fraction of a percent. The exact reduction varies from lender to lender, but in most cases, one discount point equals a 0.25% reduction in interest.1 You can purchase one, two, or more discount points, depending on what your lender offers. In some cases, you can also purchase half of a discount point.
Tip: Discount points can be bought in many increments, including half points. Ask your lender what types of discounts are offered for your loan.
Are mortgage discount points worth the cost?
With discount points, you're essentially paying cash today in exchange for future savings. The points reduce your interest rate, which reduces the amount of interest you'll pay over the life of the loan. Using points also reduces your monthly mortgage payment.
It makes sense to pay for discount points if you expect to own your house long enough to reach the break-even point — that is, the point in time when the total amount of money you've saved through the reduced interest rate equals the amount you paid upfront for the discount points. This date will vary depending on how many points you buy and the amount your interest is reduced, so be sure to ask your lender when your break-even point would be.
It doesn't make sense to purchase discount points if you need that cash for the down payment or moving costs, or if you only plan to live in the home for a few years and will never reach the break-even point.
How mortgage discount points work
To see how points can work in your favor, consider this example:
- Let's say you have a $200,000 mortgage at an interest rate of 4%.
- Your monthly mortgage payment would be approximately $955 every month (principal and interest — not counting escrow costs).
- But if you buy one mortgage discount point for $2,000 upfront, your interest rate would drop to 3.75%, which lowers your payment by about $29 per month.
- To calculate the break-even point, divide the amount you paid for the discount points (in this case, $2,000) by the amount of money you save per month (in this example, $29).
- In this particular example, you'd reach the break-even point if you own the home for at least five years and nine months, or 69 months ($2,000 ÷ $29). From that point forward, you'd save money every month.
- By the end of a 30-year loan, the total savings (after the break-even point) would add up to more than $8,400.
This is just one example. Your lender can show you exactly how mortgage discount points will impact your loan.
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
Do you have questions or ideas?
Share your thoughts about this article or suggest a topic for a new one