Mortgage Points

Ask anyone you know who has ever bought real estate what a “Point” is, and I bet you will get as many answers as there are people you ask (unless one of them is a mortgage broker—then they will know). 

The idea of “Points” comes up often in the mortgage process and can be rather confusing. I thought this article from Houseopedia.com would help explain in more detail how to use points, or even whether you should choose to use points.

A point is simply one percent of the amount of money being borrowed. On a $100,000 loan, for example, one point equals $1,000.

Points are applied in a couple of different ways, and it’s important to know the difference. Mortgage companies usually charge an origination fee equal to one point. These origination points are a one-time fee the lender charges the borrower for processing the loan.

The points that can save you money on your mortgage are known as mortgage points or discount points, and paying them is sometimes referred to as “buying down the interest rate.” Here’s how it works. The mortgage company offers to lower the interest rate it’s charging you on the loan in exchange for you paying points up front at the loan’s inception. It’s a means of prepaying interest and thus lowering your monthly payments.

“For example, assume your lender is offering a $250,000 loan at 4.5 percent. The mortgage company may offer to reduce that interest rate by a quarter-point in exchange for you paying one mortgage point at closing. (There is not a direct ratio of points paid to interest rate reduction.) If you choose to pay that mortgage point — $2,500 — at closing, you’ll reduce your monthly interest rate to 4.25 percent. This reduces your monthly mortgage payment, potentially saving you many thousands of dollars in interest over the term of the loan.”

Points can be helpful in obtaining a lower interest rate, but determining if the investment is right for you is the first step. Points are also tax-deductible for the year you obtained the mortgage. 

There’s a lot of great information in the article, but if you prefer to ask a lender directly, give me a call at (310) 864-9738 and I’ll put you in touch with the best lenders around who will gladly take the time to review the finer points of Points in the mortgage process.