You hear the term mortgage points and shudder. Who wants to pay them, right?
What if they aren’t as bad as they seem? Yes, they are a fee, but it’s a fee that helps you get a mortgage. They aren’t as bad as everyone makes them seem.
It’s time to learn the truth about mortgage points.
What are Mortgage Points?
Mortgage points have a negative reputation, but they help buyers more than you may think. Points are prepaid interest or interest you pay upfront. Usually, you buy points to lower your mortgage rate, but sometimes lenders charge points as a cost of doing the loan.
Origination points (mortgage points) are what lenders call it. Sometimes they wrap all fees into points, charging one lump sum rather than itemizing fees. Other times, they charge a point or two in addition to the itemized fees.
The amount you pay depends on your qualifying factors. How hard is your loan to process? What risks do you pose? Lenders consider these answers when determining if they should or shouldn’t charge you points.
If they do, it’s because it costs more to process your loan, but they want to make sure they still get you the financing you need.
What are Discount Points?
Discount points are optional points you pay if you want a lower interest rate. Sometimes lenders offer one rate but will lower it 0.25 – 0.5% if you pay a point. Every lender differs in the discount they’ll offer and at what price.
Ultimately, it depends on your qualifying factors and the market at the time you lock in the rate. Discount points often make sense when you’ll live in the home for a long time. If you’ll pay interest over 30 years, for example, buying the rate down may save you thousands of dollars over the life of the loan.
What’s the Difference?
Origination points and discount points sound similar, but they have several differences.
- Origination points are something the lender requires, but discount points are the borrower’s choice
- You typically can’t deduct origination points on your taxes, but you may be able to deduct discount points (talk with your tax advisor)
- Discount points lower your interest rate, origination points have nothing to do with your interest rate
Can you Negotiate Points?
Every lender has different rules. Some allow negotiations and others have non-negotiable fees. Lenders are usually more flexible with discount points than origination points. For example, you may get a little ‘wiggle’ room in the amount they’ll lower your rate for a specific fee. As far as origination points, many lenders don’t negotiate because it covers the cost of processing the loan.
Should you Pay Points?
Points aren’t a bad thing. They often help you get approved for the loan. If you shop around and have multiple quotes with points on each one, you’ll see that it’s ‘normal’ for what you’re asking.
Whether you should pay points or not depends on your circumstances. If money is tight and you’re just getting by with the required down payment and closing costs, points may put you over the edge. If you have a flexible budget though, points may help you get more favorable loan terms.
