Points are a percentage of a loan; each point being equal to 1 percent of the total loan amount (i.e. two points on a $100,000 mortgage would be $2,000). There are two types of points: discount and origination.
Discount points are points you can pay to a lender to lower the interest rate on your loan at closing. Buying points up front is one way to save thousands over the life of a mortgage loan.
One point – or 1 percent of the loan – typically saves you .25 percent on the mortgage interest rate. While that can be a good deal if you expect to be paying the mortgage over a long period of time, you might not recoup the savings if you expect to sell the property before long.
You can figure out how long you would need to keep the property to recoup the cost of discount points by dividing the cost of the points by the monthly savings.
Depending on the lender, you may be able to lock points in at different points in the loan-approval process – when you file your application, during loan processing, when the loan is approved or possibly even later.
Locking points in early may be a good idea if you expect interest rates to rise in the next few weeks, but it could cost you money if interest rates fall before closing. It makes sense to get any agreement about locking in points in writing.
Points may be tax-deductible, depending on your situation. Check with a tax adviser.
Sometimes lenders add points or fees to cover some of their costs. These are generally called origination points. They can increase the cost of your mortgage. You have the right to challenge fees that seem too high.
