Understanding Mortgage Points!

1. One Point is considered 1% of the loan

a. For Example - $400,000 home price = $4,000 (1 point)

2. Points are considered prepaid interest and can be used to "buy down" your interest rate

a. This may make sense for you IF you plan to keep your home for a long period of time

b. Each point USUALLY lowers the rate by 0.25 percent

i. How much each point lowers the rate varies among lenders.

3. Points reflect the risk of the loan

a. This is why we see hard money loans or investor loans with higher "points" because

these loans tend to be considered more risky. You pay more "points" or prepaid interest

upfront on these loans to buy down the interest rates.

4. Discount Mortgage Points are DIFFERENT than Origination Mortgage points

a. Origination points are fees paid to lenders to originate, review and process the loan.

SOOO what does all this mean for a normal buyer?

Mortgage points are optional. You do not need to pay them. However - not paying the points may result in a higher interest rate which will lead to a higher monthly payment. If you plan to refinance down the road paying the points might not make sense.

If you are trying to lock in a good interest rate and plan to stay in the home for a long period of time, paying the points upfront might make sense for you. The lender should provide upfront an official loan estimate so you can look over all fees prior to moving forward. As always ask your lender to see what the best option is for you!

Source: https://www.bankrate.com/mortgages/mortgage-points/