Mortgage points are sometimes simply referred to as points, or discount points. They are essentially a fee that a borrower pays to a mortgage lender, in exchange for a reduced interest rate. In essence, this means that a borrower can pay off some of the interest upfront in exchange for a lower interest rate. Each point typically equals 1% of the total mortgage amount. For example, let’s say a borrower took a $250,000 mortgage loan, one point will be worth $2,500. Many lenders offer borrowers to purchase anywhere between fractions of a point to 3 points.
There is a slight difference between origination points and discount points. While much less common nowadays, origination points are paid directly to the mortgage lender for the processing, underwriting, and assessment of the loan. This is opposed to discount points which just covers interest as mentioned above. Despite the differences, both origination points and discount points are both worth the same value, roughly 1% of the total mortgage loan amount. Both are also paid at the time of paying closing costs.
Borrowers and homebuyers should consider the use of discount points as an option although there are some considerations they should take. The first is the rate of interest on the loan. Another is the motivation of buying the home and whether it is an investment property or primary residence. Another point to consider is whether the mortgage loan is an adjustable-rate or fixed-rate mortgage.
While points can lower monthly payments, a borrower should make sure that they have the funds available and whether it is profitable in the long term.