Points

When you start to shop for a new home loan, you might hear a lender mention the term “adding points.” Mortgage points are fees that the lender charges on your loan in exchange for a lower interest rate. Paying points for a lower interest rate is also sometimes called “buying down the rate.” One point translates to one percentage of the total loan value. Therefore, if you take out a loan for $200,000 and pay one point to lock in a six percent interest rate, $2,000 will either be added to the principal of the loan or due at closing. The number of points added to a loan will vary from lender to lender. There are two different types of points that could be added to your mortgage, and it is important to understand what each one means.

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Discount Points

Discount points are prepaid interest, each point paid will lower the interest rate on your loan by 0.25%. Lenders will typically allow the borrower to pay between zero and four points upfront in order to discount their loan. These points are tax deductible.

Origination Points

Origination points are a fee that the lender charges to cover the cost of granting the loan, and usually will not be used as an incentive to lock in a lower interest rate. These points are tax refundable if the money was used to attain the mortgage, they are not tax refundable if the money was used to cover closing costs of the mortgage.

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Deciding if you Should Pay for Points

Paying points will not be an option for every loan. For example, FHA and VA loans will not offer points. On conventional loans, determining whether to pay for points in exchange for a lower interest rate comes down to timing. Ask yourself how long you plan to hold onto your new property before selling. Is this an investment property, a house you plan to flip, or your long-term primary residence? The longer you keep the property and pay down the loan, the more it makes sense to purchase discount points on your mortgage. Buying points could save you thousands of dollars over the life of a loan. In order to figure out if purchasing points is a good investment, you will need to compare the interest rate before and after points and figure out how many months it will take you to recuperate the cash that you paid for the points. If you plan to stay in your house for longer that the time it will take you to recover the money you spent to pay down the interest rate, paying for points is the right decision.