What are points?

Homebuyers can buy points to reduce how much interest they pay on their mortgage loan over its lifetime. A point is equal to 1 percent of the borrowed funds to purchase a home.

Deeper definition

Lenders can apply one, two or even more points to a mortgage loan to help reduce the overall cost of the borrowed funds. There are two types of points:

  • Origination points cover fees associated with the loan. This is a tax-deductible component of the mortgage process.
  • Discount points are commonly used by lenders to help homebuyers reduce the overall cost of the loan. These are a form of prepaid interest on the loan. When a buyer purchases a point, he pays out of pocket to the lender the amount of 1 percent of the borrowed funds. Then, the interest rate on the loan is less. Points are tax-deductible.

There are various benefits to buying points, but homebuyers must decide whether paying this fee upfront is possible. Points help to reduce monthly payments as well as the total amount of interest paid by the borrower over the lifetime of the loan.

See how to compare mortgage points and rates.

Points example

A points calculator can help homebuyers determine how many points, if any, they would like to pay at the time of closing on the loan. On a mortgage loan worth $250,000 for 30 years at an interest rate of 4.5 percent, the homebuyer will have a monthly payment of $2,483. If he pays two discount points, this will lower the monthly payment to $2,387, with a points interest rate of 4 percent. This can save the homebuyer about $10,000 over a decade.

Use Bankrate’s mortgage calculator to figure out how much you can save on your mortgage loan by buying points.

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