What's the Point? The Lowdown on Loan Fees

Confused by references to "points" on your mortgage settlement statement? Points are actually quite simple: they're fees, and they came by their name because they equal one percentage point of the loan amount.

REMAX_Top-dollar-house-money_s4x3

By: Karin Beuerlein

Related To:

For each point you agree to pay at closing, the lender agrees to reduce the interest rate on your loan by a set amount, generally an eighth to a quarter of a percent. This is why paying points is often referred to as a "buydown." You're simply purchasing a lower interest rate.

Here's an example:

  • On a 30-year fixed-rate loan of $200,000, paying a point ($2000) at closing might bring your interest rate down from 6.5 percent to 6.25 percent.
  • If your home is a long-term investment, that can be a good deal; you're paying $2000 up front to save nearly $12,000 over the life of the loan. Your monthly payment will also be slightly lower.
  • On the other hand, if you're low on cash for closing, consider that the $12,000 savings spread out over a 30-year period is relatively modest and you might be better off taking the higher interest rate.

Points are similar to another fee you'll see on your closing statement, the loan origination fee, sometimes called an origination point because it is also expressed as a percentage of the total loan amount. An origination point on a $200,000 loan is also $2000, but it has a different purpose; it covers some of the lending institution's cost in shepherding you through the loan application process, including paying its personnel.

But there's another important difference between origination points and discount points: discount points on new mortgage loans are usually tax-deductible, depending on your particular tax situation. Origination points, on the other hand, are not. Therefore, if your closing statement shows an origination point, you may want to ask that a discount point be substituted instead. (Ask your accountant for advice on this.)

How can you tell whether you should pay discount points? In a nutshell, points are for long-term gain. Therefore:

  • If you are truly cash-strapped at closing, paying points may not be worth saving a small bundle in interest over many years.
  • If you're not planning to live in your home very long, skip the points. You won't ever realize the savings.
  • Use a mortgage calculator to gauge for yourself whether points are a good idea and to see how long it takes to break even.

Next Up

5 Types of Neighbors and How to Handle Them

You may love your house, but getting stuck with bad neighbors may have you thinking about putting up a for-sale sign. Here are some tips on dealing with rude, sloppy or nosy neighbors, and even those mean ones with spite houses.

Short Sale Rules: What You Need to Know

A short sale occurs when a property is sold for less than what is owed on the mortgage with the lender's approval. Learn the advantages and disadvantages of this type of transaction for the seller and the buyer.

What Foreclosure Means and How to Stop It From Happening

Learn about the various steps in the foreclosure process and ways you can avoid losing your home.

The Skinny on the Short Sale

How to get a short sale when you're facing foreclosure on a house.

Saving Money While Paying for a Home

You may be financially "exhausted" from saving for your home purchase, but now's actually a great time to keep saving.

Scheduling Your Relocation

If you can postpone your move, you could save some major cash.

Moving Day Tips: How to Pack for a Move

These 10 packing tips will help you move more efficiently and smoothly.

Sellers: What to Do When You Can't Find a Home Before Yours Sells

If you sold your house before you've found new digs, don't worry: You have options.

What Are Lease-Purchase Options?

In a tough housing market, sellers may use lease-purchase agreements to lock in qualified buyers who may not be ready to close now but will be in the future.

What's in a Mortgage Payment?

Your total monthly payment may be divided among these four items.

Go Shopping

Get product recommendations from HGTV editors, plus can’t-miss sales and deals.

On TV

Follow Us Everywhere

Join the party! Don't miss HGTV in your favorite social media feeds.