What Are Points Anyways? Stress Free Mortgage

One of the questions that I get when I encourage clients to ask questions about the mortgage process and purchasing or refinancing a home is “what are points?” This is one of those terms that we in the business use liberally and not always in a way for clients to understand.
If you are paying points, you are paying a percentage of your loan amount. If your loan amount is $500,000 and you are being charged one point, you have to come in with an additional $5,000 in costs for your loan.
Points are often referred to other names as well, which is why confusion can set in. Various terms are Discount Points, Origination points, Broker Fees and there are also Buy Down Points, but those have to be paid by the seller in a purchase only.
Paying points can lower your interest rate but a common misconception is that paying 1 point will lower your interest rate by one percent. Typically paying one point only lowers your interest rate by .25%.
When interest rates are moving up, sometimes using discount points for a lower rate can make sense.
Locking in your rate with or without points is a conversation you need to have with your loan professional at the start. I look at how much you are paying in points and what that saves you in your monthly payment and see how many years until you make up that cost to decide the rate and points.
You should always be supplied with the breakdown of fees and understand all of them. If there are points, discount points or any fees that are not clear to you, make sure to ask your loan professional. If they cannot tell you whether you are paying any points for your rate, be wary. We always make sure our clients understand their fees.