- Posted by Jordan Blakley
If you have begun comparing quotes from various lenders, you have most likely come across the term points. Some companies charge origination points during closing, while others offer discount points for those able to make larger down payments. But, what exactly do these pesky points do? And most importantly how do they affect your mortgage payments?
A mortgage point is equivalent to 1percent of a total loan amount. For example, on a $100,000 mortgage, one point would cost $1,000. Just keep in mind even though purchasing points will lower your interest rate, it won't lower your loan amount. That $100,000 loan will still be $100,000 even if you choose to purchase those two points.
In addition, points come in two varieties origination points and discount points.
Origination points are non-deductible fees, that may be charged by mortgage companies. They typically serve to pay the lender for processing, underwriting and approving your home loan application. In essence, origination points are simply another form of an expense charge.
But there is some upside! Because origination points are not standardized, they may vary in cost. As a result, you may be able to negotiate the number of origination points assessed on your home loan to help lower the overall fee.
Discount points act as a form of prepaid interest on a home loan. For every point purchased at closing, borrowers could reduce their interest rate. As a result, the more points you pay, the lower the interest rate on your loan and, most importantly the lower your future monthly mortgage payments!
Just remember, although a borrower can typically pay anywhere from one to four points on his mortgage, the associated interest rate discounts may vary depending on the real estate market and mortgage company. Therefore, make sure to discuss a lender's point practices before making any commitments.
Discount Points: Worth the Price?
Well, it depends on a number of factors, such as how much money you have available to put down at closing and how long you plan on staying in your house. Lenders often suggest homeowners plan on living in their homes for at least five years before committing to paying points. After all, you want to be certain you will be able to see a return on your investment and recoup that additional upfront cost.
Pointing You in the Right Direction
Mortgage points can provide a way to pay off closing costs and/or lower one's interest rate. But points may not be right for everyone. So, before you commit to paying for origination or discount points, make sure to consider the following:
- How much money will you have available at the time of closing?
- How long do you plan on living in your home?
These questions will help you better determine if paying more upfront is the right choice for you.