When discussing a mortgage, what exactly are points and why are they important? Simply put, points are a percentage of your loan amount. For example, 1 point on a $100,000 loan is $1,000 (1%). Points are important because they can be used buy down your rate as well as a few other uses. Don’t worry we’ll go into more detail in a minute.
To start, there are three types of points. Origination, discount, and rebate. Origination points are used to pay your lender. Sometimes origination points are built into the rate so you don’t see it. Other times you will see either a point or half point charge clearly stated. Origination points are important to us, but they may not be as important to you.
However, the second type is discount points which are prepaid interest, a percentage of your loan amount. Discount points allow you to pay prepaid interest and save money over the life of your loan. As an example, you could pay 1% interest upfront to pay a lower amount on your monthly bill. When considering if it’s a good idea to buy down your rate, it’s important to look at how long you plan on being in the home and how long you plan on having the loan. Generally, the longer you plan to own the home, the more you can save by buying down the rate. However, it’s important to note that how long you plan on staying in your home may be different than how long you plan to have your loan. Depending on rates and other life circumstances, you might want to consider refinancing at some point, which would be considered a completely new loan. Buying down your rate can be an excellent way to save money on your monthly bill but make sure to discuss with your loan officer to see if it’s right for you.
The third type of points are rebate points. Rebate points are generally reserved for mortgages with higher interest rates as the market pays off your rebate. They provide money to help with closing costs or pay off other third party settlement charges. By accepting money upfront, borrowers in return pay through a higher interest rate.
We hope you now have a better understanding of points when talking about a mortgage. If you have any questions regarding whether or not you have points with your mortgage or if it makes sense to buy down your rate, contact your loan officer to see if we can help you out.