Borrowers typically pay points in connection with a mortgage loan.
One point is equal to 1% of the loan. A fee of one point on a $150,000 loan would be $1,500. Many people get confused and think the points are calculated based on the purchase price.
They are not, the loan amount is the important number.
The money paid for points can be used for a wide variety of things, so it is important to find out the purpose of the points, as well as the amount, when comparing loans. There are two varieties, origination points and discount points.
Origination points cover closing expenses and fees, including the mortgage broker’s profit. Many of the fees covered by origination points are really just disguised additional profit for the lender, and they are completely negotiable.
Discount points are used to buy down your interest rate because you are prepaying some of the interest with the discount points. The amount you can reduce your interest rate varies with the type of loan and market conditions at the time.
Typically, though, you will have to make mortgage payments for several years before you start saving money because of the buy-down.