What are points?
Points, also referred to as discount points, are an upfront interest paid to buy a lower rate on the mortgage for the term of the loan. A point is expressed as a percentage of the total loan amount. For example on a loan amount of $100,000, one point would be equal to $1,000 or two points would be equal to $2,000. This amount would be paid at closing in addition to the down payment and other closing costs. Points are not beneficial to every borrower and need to be evaluated on a case-by-case basis. To determine if it is beneficial to you to pay points, you need to first calculate the principal and interest payment for the loan amount based on a rate with 0 points and then also, a payment based on a rate with points. The difference in the two payments is the amount you will save by paying points. The next step is take the total cost of the points and divide by your monthly savings. This figure shows you how many months it will take to recoup the costs of the points. If you plan on being
In real estate, the term “point” refers to 1% of the total mortgage loan amount. Buyers may chose to pay this supplemental fee, calculated in points, to get a lower interest rate on a particular mortgage, particularly in a time of high interest rates. For instance, a lender may offer you a choice of two 20-year mortgages: the first at 10% with no points, and the second at 9.5% with an additional three points. If the loan is for $100,000, those three points will cost you an extra $3,000 up front- but you’ll get a payback of significantly lower monthly payments ($840.85 vs. $877.57) for the lifetime of the loan.
In the special vocabulary of mortgage lending, “points” are a type of fee that lenders charge (the full term to describe this fee is “discount points”.) Simply put, a point is a unit of measure that means 1% of the loan amount. So, if you take out a $100,000 loan, one point equals $1,000. Discount points represent additional money you can pay at closing to the lender to get a lower interest rate on your loan. Usually, for each point on a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point. TIP: Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.
Points are prepaid interest, which you can pay to your lender at closing in exchange for a lower interest rate on your mortgage. Each point is equal to 1% of the loan amount. Paying points at closing will lower your monthly payment. Whether they will save you money in the long run depends on how long you plan to stay in your home.
