What Are Mortgage Points?: A Helpful Guide

For most of us, a home is the biggest investment we’ll make in our lifetime, so it’s natural that we want to reduce the cost of a mortgage as much as possible. Apart from applying negotiating tactics and shopping for the best rates, many homebuyers choose to buy mortgage points.

But what exactly are mortgage points or discount points, and how do they work? Let’s take a closer look:

What Are Mortgage Points?

Mortgage points refer to the fees a borrower pays a lender to reduce the interest rates on the loan. This lowers the overall interest amount they pay over the term of the mortgage. It is sometimes called “buying down the rate.”

Every point the borrower buys is equal to 1% of the mortgage amount, meaning that a point on a $400,000 mortgage amounts to $4,000.

In a way, mortgage points are prepaid interest. By purchasing points, you can cut down the loan’s interest rate, often by 0.25% per point. You can usually buy as many as three whole points (or even more sometimes).

When you reduce the loan’s interest rate, you can lower the payments you make monthly. You must remember that this requires an upfront payment. The longer you live in a home, the more you’ll benefit from paying for points.

Discount Points vs. Origination Points

You should not confuse discount points with origination points which are entirely different types of mortgage points.

Origination points do not affect the loan’s interest rate and are mandatory instead of discretionary. These are fees that a lender charges to originate, review, and process the loan. One origination point is often equal to 1% of the total mortgage. Borrowers usually pay origination points as part of your closing costs when the purchase is finalized.

Should You Buy Mortgage Points?

Buying mortgage points is a good way to lower the overall cost of your mortgage and lessen your monthly payment. It makes sense if you plan to live in the home for an extended period. With the reduced monthly payments, the amount you save every month is worth the upfront fee you pay.

If you don’t plan to refinance anytime soon, it can be good for you to buy mortgage points. Even if you intend to stay in the house for many years, you might consider a refinance down the road. Doing so will certainly change the mortgage interest rate, so if you think you’ll be doing that in the future, you might want to skip buying mortgage points.

Compare Loans and APR

A closer look at your mortgage’s APR or annual percentage rate can help you compare loans with different point and rate combinations. The APR incorporates not only the interest rate but also the points you pay and the fees the lender will charge, giving you more clarity and allowing you to make comparisons easier.

Conclusion

Mortgage points are one of the most important aspects of a home loan. They are a form of prepaid interest that can lower the overall cost of your loan and potentially shorten the time it takes to pay off your loan.

Mortgage points can be paid upfront at closing or added to your loan balance. While the upfront payment of points can offer a lower interest rate, the long-term savings may be minimal. It is essential to consider all your options before deciding whether or not to purchase points. Be sure to talk to your loan officer to understand the process and determine the right option for you.

Get In Touch With Your Trusted Mortgage Specialist Today!

MidAmerica Bancorp, Inc. can provide you with the housing loan solution in Burbank that you need. MidAmerica Bancorp, Inc is licensed and recognized in Florida, Illinois, Indiana, Florida, Michigan or Wisconsin. Contact us at (708) 237-4050 to learn more about our loan products!