What are Mortgage Points?
It’s a simple way of saying you’ll be charged “X” amount for obtaining the loan with this mortgage broker or that bank.
A point is just a fancy (or not fancy, depending on how you look at it) way of saying a percentage point of the loan amount.
So if a bank says it’s charging you one point and your loan amount is $100,000, the cost of the mortgage point is $1,000. If your loan amount is $200,000, that fee is $2,000. And so on…
While this is easy enough to understand, how much you’re charged (and why) may not be.
For example, a lender may not charge you anything out-of-pocket (no points), but offer you a higher interest rate to compensate.
So instead of snagging that hot 4.5% rate on the 30-year fixed you qualify for, you may wind up with a 5% rate and no points.
That might make sense if you don’t plan on staying with the loan (or the home) for a long period of time, but it could also mean you’re getting a bad deal.
There are situations where you might be charged one mortgage point upfront while also getting pushed into the higher rate, effectively paying twice what you should in fees (thanks to the yield-spread premium and/or service release premiums).
Sometimes Paying Points Lowers Your Interest Rate
Keep in mind that you can also pay mortgage discount points to lower your interest rate.
So if you qualify for a rate of 4.5%, but desire a rate of 4%, you can pay “X” number of mortgage points to lower the rate to that level.
These are considered a form of pre-paid interest and are therefore tax deductible – you’re essentially paying the interest upfront at loan closing as opposed to monthly.