Points are one of the most misunderstood aspects of mortgage loans.
In the simplest definition mortgage points are a percentage of your loan amount due at closing for one of two possible reasons.
Here are the basics you need to know about mortgage points and how you can decide if paying them is worthwhile when refinancing your home mortgage loan.
Types of Mortgage Points
Mortgage points come in two flavors. One point is equal to one percent of your mortgage amount and is the fee you’ll be required to pay at closing. There are the discount points you pay to the lender in exchange for a lower mortgage rate and the origination points you pay to the broker for their part in arranging your loan. Brokers and lenders do not always require that points be paid; however, some lenders hide their point requirements in the fine print hoping to distract you with an unnaturally low mortgage rate.
If you don’t agree to pay the points required for that low mortgage rate you’ll find the actual interest rate is often much higher than the going market rate. This is a common bait and switch tactic used by mortgage lenders to boost their profits. Fortunately once you understand how points work this is an easy scam to avoid.
Should You Pay Mortgage Points?
Deciding whether or not paying points to the lender is in your best interest depends on how long it will take you to recoup the expense based on the lower monthly payment you are getting. We’ve all seen the commercials on television promising insanely low rates with a lot of very small print flashed up on your screen. If you pause the commercial and squint you can just make out that this lender requires two points at closing to qualify for this low rate. Does it make sense to pay the fee?
You can easily determine this with a simple mortgage payment calculator. First compare the lower payment with points to the higher payment without points. The difference between the two payments is your monthly savings. Suppose you were refinancing a $200,000 loan with this lender. Two points would amount to $2,000 due at closing. If the monthly payment is $35 lower it will take you almost five years to recoup this expense. If you plan on staying in your home for the long term paying points can be beneficial; however, if you sell your home before this you’ll be losing money by paying points.
What About Origination Points?
Mortgage brokers often charge origination points for their part in arranging your loan. Not every mortgage charges origination points as brokers can receive compensation from the lender behind your loan. If your broker is charging you a fee for arranging your loan a reasonable fee to pay is 1-1.5% of your loan amount.
You can learn more about your mortgage refinancing options including costly mistakes to avoid by registering for my free video tutorial.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
