Points on your mortgage settlement statement: What are they?

When you close on a home, you will be faced with a settlement statement. If you are taking out a mortgage to finance your home, that statement will include a mortgage settlement statement from your lender detailing the costs and fees associated with your loan. On that settlement, you'll notice something called "points." Just what are these "points?"

Lenders charge points to cover the costs of a loan. If a borrower has credit problems and is considered a risk, he or she may be charged more points than a borrower who has a better credit rating. Borrowers can also purchase points to lower the interest rate on their mortgage. These points represent additional money that a home buyer may have to pay to his lender at closing.

There are two different kinds of points: "Origination" points and "discount points."

"Origination" points

"Origination" points are fees charged to you by your lender. These points cover some of the lender's costs for preparing and submitting the loan; it's also a way for the lender to earn more money from the loan upfront.

Each point charged is 1% of the loan's total amount. So, for one point on a $100,000 loan, you pay $1,000; for two points, you pay an extra $2,000, and so on. These points may be tax deductible if they meet certain conditions. (For more on mortgage points, read "Topic 504 -- Home Mortgage Points" from the Internal Revenue Service.)

"Discount" points

"Discount" points are points that a borrower can choose to purchase (they are optional) to "buy down" the interest rate on a mortgage. While you'll have to pay more money upfront, these points save you more money over the length of the loan the longer you stay in your home.

These points are also expressed as a percentage of the total loan amount -- 1%. Therefore, a point on a $200,000 mortgage is a $2,000 fee, two points amounts to a charge of $4,000, etc.

For each point that you pay for, your lender will agree to lower the interest rate on your loan by a certain amount, usually somewhere between an eighth (.125) to a quarter (.25) of 1%. For instance, your lender may lower your interest rate from 6% to 5.75% for the cost of one point on your loan. If you purchase two points, you can have your interest rate lowered even more.

While discount points can save you money in the long run, they can add to your closing costs, and might not be worth it if you'll only own your home for a short period of time, or less than five years -- you might not save enough money in interest to cover the cost of your points.

A plus to discount mortgage points are that they also may be tax deductible. Read "Topic 504 -- Home Mortgage Points" from the Internal Revenue Service for more information.

Comments

By Michelle J. Drum,  Wed Jul 14 2010, 06:58

Very good article. I personally do not recommend a buyer paying points because why pay with today's dollars when with inflation the dollar will cost you less in the future.

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By Fran Rokicki,  Thu Sep 9 2010, 17:27

With the rates now, at an all time low, points are usually not necessary. The old rule of thumb used to be, if you are planning to stay in the home for a long period of time, the points are worth it. Check with your accountant to see if this is something you should be considering. There may be tax advantages, also.

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By J. Mario Preza, CRB, CDPE,  Thu Nov 11 2010, 13:17

Most buyers enter the house buying arena with a notion of what is involved and only later discover that buying a house requires a bit more information. The best thing anyone wishing to buy a house ought to do is to do a little homework first. Read up a little on what's involved, ask a lot of questions of the many real estate agents you're bound to come across. As for one point or another, with all the changes taking place in the financing arena, even not paying points will not change the exorbitant fees a typical purchase requires. If you're coming in with a minimal down payment, don't be surprised if your closing cost, points or no points, after factoring in the higher costing private mortgage insurance, might reach a whopping 2.5 to 3.0 percent of the actual price!

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By Nicole Lyon,  Sat Dec 4 2010, 20:51

The definitions in this article are accurate and easy to understand. I agree, interest rates are so low, that it doesn't make sense for a buyer to buy down the rate.

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By Kay Gupta,  Thu Dec 9 2010, 07:28

The article is good and easy to understand but saying that lenders charge points if credit score is low? Lenders do charge upfront mortgage insurance (up to 10 years) plus give you a higher rate. If you want a lower rate to make your payments fit into your budget you would pay points.
On the other hand if you see that you can improve your credit scores (There are ways for that) relatively short period of time you may choose to refinance soon enough to get a lower mortgage rate without paying any points. For all things do your homework, calculate the risk and rewards, and ask as many questions as you think the possibilities are! http://www.guptahomes.com

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By Fran Rokicki,  Sun Mar 20 2011, 06:51

Though this is a post from last year, here are some changes that went into effect this February 21st of 2011. Every home that is purchased will have an added 1/4 point to repay the government for bailout monies that were given out. Starting April 18th, pmi charges will increase. The monthly fee will be higher, than it has ever been. Will this now, affect the sales price of the home?

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By Adrian Provost,  Mon Feb 27 2012, 16:58

This is valuable information.

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By Ernie Lester,  Mon Apr 9 2012, 17:19

Just wanted to chime in here to say that whether or not to buy down the rate with loan discount points is NOT someone's opinion and using a thumb rule may or may not do the job either!
We've developed a web program that deals with this issue correctly. It first finds your purchase power based on your own stated cash available, your budget for total monthly payment, and your credit score. Then it recalculates for every available rate/points and calculates your total cost over your expected tenure... all the time keeping each transaction "equivalent to seller" (nets same to seller) and keeping the cash at closing near your specification. Lowest cost wins.
We took it a bit farther so that you can understand the impact of buying down the rate and then selling sooner than expected.
We're in BETA testing of the app at this time, but real estate and mortgage pros (who will sponsor the app) are welcome to take a test drive:
http://www.mortgenius.com ..

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