Points (Discount Points)
Points are upfront fees paid to a lender at closing to reduce the interest rate on a mortgage, with each point equal to 1% of the loan amount and typically lowering the rate by 0.25%.
Exam Tip
1 point = 1% of loan amount. Buying points lowers interest rate. Calculate break-even to see if points make sense.
What Are Mortgage Points?
Points (also called discount points) are fees paid directly to the lender at closing in exchange for a reduced interest rate. Each point equals 1% of the loan amount. Paying points is called "buying down" the rate.
How Points Work
| Points Paid | Fee (on $300,000 loan) | Typical Rate Reduction |
|---|---|---|
| 0 points | $0 | Base rate |
| 1 point | $3,000 | ~0.25% lower |
| 2 points | $6,000 | ~0.50% lower |
| 3 points | $9,000 | ~0.75% lower |
Discount Points vs. Origination Points
| Discount Points | Origination Points |
|---|---|
| Buy down interest rate | Pay for loan processing |
| Optional | Often required |
| Tax deductible | May not be deductible |
| Reduce monthly payment | No rate reduction |
When Paying Points Makes Sense
| Situation | Recommendation |
|---|---|
| Long-term ownership | Points likely beneficial |
| Short-term ownership | Skip points |
| Extra cash available | Consider points |
| Tight budget | Skip points |
Break-Even Calculation
| Factor | Example |
|---|---|
| Cost of points | $3,000 (1 point on $300K) |
| Monthly savings | $50/month |
| Break-even | 60 months (5 years) |
Break-even = Cost of Points ÷ Monthly Savings
Tax Implications
| Situation | Tax Treatment |
|---|---|
| Purchase | Generally deductible in year paid |
| Refinance | Deducted over life of loan |
| Seller-paid | Deductible by buyer |
Points and RESPA
Under RESPA, points must be disclosed:
- On Loan Estimate
- On Closing Disclosure
- Cannot be hidden in other fees
Negotiating Points
- Points are negotiable
- Compare APR, not just rate
- Consider lender credits (negative points)
- Calculate break-even before deciding
Study This Term In
Related Terms
Mortgage
Real EstateA mortgage is a loan used to purchase real estate, where the property serves as collateral, typically repaid over 15-30 years with interest.
Closing Costs
Real EstateClosing costs are fees and expenses paid at the real estate closing beyond the property price, typically 2-5% of the loan amount, including lender fees, title insurance, escrow, and prepaid items.
RESPA (Real Estate Settlement Procedures Act)
Real EstateRESPA is a federal law that requires lenders to provide borrowers with clear disclosures about settlement costs and prohibits certain practices like kickbacks and referral fees that can inflate closing costs.