What exactly are points and how do they work?

Asked by Rupert Okocherry, Merrillville, IN Mon Jan 3, 2011

I'd like to have an understanding of points and how they work

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Tim Moore, Agent, Kitty Hawk, NC
Mon Jan 3, 2011
Points are a way the lender makes some profit right now by lowering the interest rate by getting some money upfront. Approx 8 discount points will equal 1 % of interest rate. So if you saw a rate of 5% you could lower that rate to 4% if you payed 8 discount points to the lender to allow you to do it. Each point is 1% of the loan amount.

So if you have a 5% loan where you borrow $200,000

You could pay 2 points ($200,000 x 4%) = $4000 to lower the rate from 5% per year to 4.50% per year. The points basically give the lender some instant profit for lowering the loan interest rate.
1 vote
Bill Vossos, Agent, Schererville, IN
Wed Jan 12, 2011
Hi Jermaine,

It looks like you've gotten some pretty good answers and I hope they've cleared up any questions you may have. If you are interested in house listings, I service Merrillville and the surrounding areas and would be glad to help. You can reach me my email or cell.

Bill Vossos - Associate Broker
Century 21 Executive Realty
219.680.9037 - Cell
0 votes
Dan Tabit, Agent, Issaquah, WA
Mon Jan 3, 2011
There are two different kinds of "Points" to be aware of. One is a fee charged to originate your loan charged by the lender or broker as a means of obtaining their wholesale rates. This is a broker’s primary compensation.
The other are Discount and or Rebate points. Rates are actually the same every day, it's the fee attached to a given rate which can change multiple times a day. On any given day 4% may be available for a 30 year fixed rate loan. If "rates" are down it means that to obtain 4% you may not have to pay any discount points or may even get a rebate from the lender. If the fee associated with a rate is high, say it costs 2 points to obtain 4%, you would likely be better off accepting a higher rate without a fee, for example 4.375% no points.
As others have said, one point is equal to 1% of your loan amount. One point on a $200,000 loan would be $2,000.
In most cases, paying points for a lower rate doesn't pay for itself in the short to medium term. Talk to your lender about their recommendation when it comes time to lock your interest rate. I hope this helps.
0 votes
Clark Riel, Agent, Reno, NV
Mon Jan 3, 2011
Paying points to lower your interest rate may sound nice, but you need to determined what your pay back will be. Calculate the difference in payment without and with paying points, divide the difference into what the points cost you and that will give you the payback period in months. You may find that it is advantageous to pay them, but the cost can be high and maybe the pay back period is longer than you think you'll own the home. Current interest rates are pretty low without paying points.
0 votes
The 2 Mortga…, Mortgage Broker Or Lender, Kokomo, IN
Mon Jan 3, 2011
a point is 1% of your loan amount. we have an educational video series called Show and Tell with the 2 Mortgage Guys and there is video explaining this in detail.
Web Reference:  http://www.2mortgageguys.com
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