Understanding Points on Your New Home Loan

by Meiling Hunter
CMR Columnist

Buying a new home--or even refinancing one--can be a whirlwind experience. If you are shopping for a new home loan, don't focus only interest rates. You also need to be aware of "points," and how they can affect your home loan and pocketbook.

What Are Home Loan Points?

Points are fees paid in order to obtain a new home loan. Each point charged is equal to one percent of the total loan amount. For example, one point on a $100,000 loan equal $1,000. There are two different types of mortgage points associated with your home loan:
  • Loan Origination Points. Sometimes called "upfront fees," these points are fees charged in order to start the loan process. Points or even fractions of points often differ among lenders. Some lenders may not charge any origination points at all, so comparison-shopping is key.
  • Discount Points. These directly affect your interest rate. The number of points charged here depends on your credit and the current mortgage climate. If you have bad credit, you might have to pay two, three, or four times as many points as those with good credit. Again, each point
    • charged equals one percent of the total loan. Here you can see how bad credit could become quite costly.

Buying Down Home Loan Points to Get a Lower Interest Rate

Some lenders may offer a "buy down" option for your new home loan, where you pay for a lower interest rate. This option is generally good for those who want a lower interest rate and a lower monthly payment, and have cash on hand. Typically, for each point paid, the interest rate drops about one-quarter of one percent (0.25). For example, let's say that you are refinancing a $100,000 home loan on a 30-year term and are offered a 6.50% interest rate. If you paid one point to lower your rate ($1,000), your new rate would be 6.25%. At 6.50% your monthly payment would be $632.07 (not including taxes and insurance). At the buy-down rate of 6.25%, your monthly payment would be $615.72, a difference of $16.35 a month. Over the course of a 30-year loan, this would more than compensate for your prepaid $1,000.

As you can see, the buy-down option makes sense if you plan on staying in your home longer than it takes you to recoup your prepaid points. If you are not looking to stay in your home long enough to break-even on your prepaid fees, you may want to consider other home loan options.

Source:
The Mortgage Professor

About the Author
Meiling Hunter has worked in the mortgage industry for four years. She graduated from the University of California, Davis, with a double major in Economics and Philosophy.

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