This video reflects the perspectives of the Gaylord-Hansen Team at loanDepot. We advise discussing directly with your mortgage expert or lending professional for any advice regarding your particular situation.
We get asked all the time “what are points on a mortgage?” This is a great question and one that can save you thousands of dollars either by paying points or even by not paying points. We will show you what a point is, how it can impact your interest rate, and whether or not it is a good idea to pay points.
Let’s first discuss what a discount point is. Discount points are also known as points on a mortgage. A discount point is simply a percentage of the loan amount charged by a lender to allow you to obtain a lower interest rate. You will typically hear about a lender charging you one point or a half point. What does that mean?
In simple math, one point is equal to 1% of the loan amount. Let’s take, for example, a $100,000 mortgage. One percent of $100,000 is equal to $1,000. See the video for further examples of points.
Points do not have to be round numbers like above. The most common increments are ¼ , ½ , ¾ , and 1 point. Points can be negotiated. Remember this when shopping for a mortgage. The least amount of points for the lowest interest rate is what you are trying to obtain.
Now that we know how to calculate a point, the bigger question is what does paying points actually do for you? The purpose of paying any type of points is to help you obtain a lower interest rate. In other words, paying points is the cost of obtaining an interest rate. Typically, the more points you pay, the lower your interest rate will be. Ultimately, the goal is to save as much money as possible over the life of your loan to reach your long-term financial goals.
Let’s use an example to help you understand. When shopping for an interest rate, the most common question we hear is “what is your interest rate?” It is a loaded question, as there are so many factors that go into determining the interest rate, including type of mortgage, loan term, FICO scores, loan-to-value, length of time expected to keep the home, payback period, interest rate trends, etc. It’s not as easy as it sounds. However, let’s assume we know all those variables. See the video for a simple representation of points and interest rates.
As you can see above, the interest rate drops by paying more points. Your goal is to pay as little in points as possible and achieve the lowest rate you can secure. Remember, points are negotiable.
In another video, we will go into when it makes sense to pay points for your personal situation.
One last note: Are points the only cost of the mortgage? The simple answer is no. Points are just used to lower the interest rate. You will likely incur other costs to obtain a mortgage, such as mortgage fees like underwriting and processing, an appraisal fee, title fees, and other closing fees. We discuss typical closing costs in another video.
We hope this information was useful to you. Now go out and negotiate your points!
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