What are points?
Points are a percentage of the loan amount paid at closing that affect the interest rate. For instance, on a $90,000 loan, 1 point = 1% or $900. How it works is that if a borrower pays points, they buy down the rate. Alternatively, in exchange for a higher rate, the lender pays points to offset closing costs. These are considered negative points. Negative points may be a wise option if a borrower has limited funds to use at closing. Points are also disclosed as discount points. Whatever the name, they are itemized on the Good Faith Estimate and are typically paid at closing.
Points are a percentage of the loan amount paid at closing that affects your interest rate. For instance, on a $90,000 loan, 1 point = 1% or $900. How it works is that if you pay points, you buy down the rate. Alternatively, in exchange for a higher rate, the lender pays points to offset your closing costs. These are considered negative points. Negative points may be a wise option if you have limited funds to use at closing. Points are also disclosed as discount points. Whatever the name, they are itemized on your Good Faith Estimate and are typically paid at closing.
A. Points are fees used to adjust the yield on a mortgage to current market conditions. There is an inverse relationship between points paid and the interest rate on a mortgage. As the interest rate gets higher, the points get lower. A point equals 1 percent of the mortgage amount. For example, 1 point on a $100,000 mortgage would be $1,000.
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Points are effectively pre-paid interest charges. The more points that you pay, the lower the interest rate that you receive. A “point” is equal to 1% of your loan amount. You have to consider the cost of each point against the lower rate, and make the decision that best suits your needs. In most cases, do not pay many points if you do not intend to keep the mortgage for a long time.
