What are points on a mortgage?
You may be wondering: what is a mortgage point? Well, if you’ve ever heard the phrase “buying down the rate,” you might have some idea about what mortgage points are.
There are two main types of mortgage points: origination points and discount points.
Mortgage origination Points
- Mortgage origination points are paid to the loan officer for the actual loan creation. Origination points have become less prominent than discount points, but some lenders still include them in their loan closing processes.
Mortgage Discount Points
- Discount points on a mortgage, the most common type, are payments made by a homebuyer directly to a lender—most often a bank—in exchange for a reduced interest rate. This means that the homeowner pays up-front interest to have a reduced interest rate while paying off the remainder of the loan. You can think of discount points as prepaid interest: The more discount points you buy, the lower your interest rate. Lenders usually limit you to three discount point purchases.
We use mortgage points and discount points interchangeably here since mortgage discount points are much more likely than mortgage origination points to impact your home purchase process.
What is a mortgage point worth?
One mortgage point is usually equivalent to one percent of the full loan amount. For example, one point on a $500,000 mortgage should cost $5,000. Your interest rate will typically lower about 0.25 percent for each point purchased, although this depends on your lender, the type of mortgage loan, and the interest rate ecosystem in the current housing market.
