On a $100k loan amount 1 point = $1,000, 2 points = $2,000, and 1.375 points would be $1,375.
If it is worth paying points or not depends on how much of a lower interest rate & payment you would get by paying the points & how long you intend to stay in the loan for.
On the $100k example above, if you were to choose between 4% & 3.875%, the difference in payment would be $7/mo. Hypothetically if it cost you .375 in points ($375), then you divide $7 into $375 and you get 53.57 payments to break even, since you make 1 payment a month that translates into 53.57 months, or a little less than 4.5 years. Would you be in the loan for at least 4.5 years? Then you would breakeven, and every month after that you would save $7/mo more than you would if you didn't pay the points.
Now the above is just an example, the amount of points to buy down your interest rate by .125% isn't always going to be .375 in points - it can be greater or smaller. When you go to lock in your interest rate is usually when you need to make the decision on if you want to pay points or not.
Shane Milne | NMLS #81195 | Lending in all 50 states
Patric Santo Pietro
Prudential NJ Properties
If you borrow $100,000, 1 point is 1% . . . or $1,000.
Sometimes, depending on the loan, points are mandatory. They're required. In that case, you can't do anything (except to look for another loan that doesn't require points).
Sometimes you can reduce the interest rate on a loan by paying points. Shane explains it nicely.
Hope that helps.
Origination points are a type of fee borrowers pay to lenders or loan officers in order to compensate them for the role they play in evaluating, processing and approving mortgage loans.
A point is a percentage of the loan amount. For example, on a $200,000 loan, 1 point would be $2,000.
Discount points are used to buy down the interest rates, temporarily or permanently.
Origination fees and discount points are both items listed under "#800 Items Payable in Connection with Loan" on the HUD-1 Settlement Statement.
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