As a homebuyer, you may have heard the term ‘mortgage points,’ but understanding exactly how these points work to help save you money may be unclear. Find out more about this common home financing fee and if buying points is right for you.
Mortgage points definition
There are two types of mortgage points: discount points and origination points. ‘Points’, more commonly referenced are tax-deductible1 discount points, and they are basically prepayment of the interest on your mortgage loan. They’re fees paid at closing which result in a reduced interest rate and therefore a lower monthly payment. Exactly how much interest is reduced per point varies by lender and market conditions but typically the reduction is around a quarter to a third of a percent on fixed interest rates. Mortgage lenders usually offer up to three discount points to be purchased.
Origination points, on the other hand, are fees paid to cover the cost of making the loan. Many mortgage lenders do not require payments of origination points that vary based on the amount you borrow but instead may charge a flat origination fee. This fee may be tax deductible if it was not used to pay other closing costs.1
What is the cost of a mortgage point?
The cost of a mortgage point (discount point) equates to 1% of the total loan amount. For example, on a $100,000 mortgage loan, one mortgage discount point would cost $1,000. Whereas, 0.5 point on the same mortgage would cost $500.
Should you purchase mortgage points?
Whether you should purchase mortgage points depends on how long you plan to stay at your new home and your current ability to pay for the mortgage points. The longer you reside in the home, the more you’ll save on interest in the long run from buying discount points. Meanwhile, if your budget doesn’t allow you to buy mortgage points when you close on the loan and you don’t intend to stay at your home for a long duration, buying less points or none may be the better option.
Our mortgage points calculator can help determine if you should buy points based on your mortgage amount and term. You can also explore varying discount points and point rates to see whether buying points is right for you.