The term “point” or “points” may be thrown around as you prepare to either refinance your home or purchase a home. While many lenders and Real Estate professional may understand Real Estate lingo, many of us are left wondering what all of the terminology means. So, what exactly is a mortgage point?
Mortgage points are also referred to as discount points and are a fee that you will pay to the lender when being approved for a home loan, whether a new loan or a refinanced loan. The number of points that you will be asked to pay will vary pending on the lender, type of purchase, and loan amount.
Let’s say you are trying to refinance your home in order to lock in a lower rate and you are asked to pay 3 points, that is the equivalent of 3% of the new loan amount. For Example:
Loan Amount: $350,000
1% = 1 Point: $3,500
3 Points = 3%: $10,500
While the term mortgage points may be confusing it is actually quite simple once you break it down. One point simply equals 1% of the total loan amount. Many financial experts have opinions on how many points you should be willing to pay, however, ultimately you have to factor in the costs of refinancing your home, also being sure to factor in the cost of the points and how long it would take for your savings on interest to break even with the points purchased. Generally, the points you have to pay are factored into your new loan so you won’t be paying the fees upfront, but rather they will be rolled into your loan amount/monthly payments.
It varies from lender to lender, however, in general purchasing one point (1% of the loan) can lower your interest rate by an average of 0.25 percent. While refinancing can save you on your monthly bills, should you be required to purchase multiple points to do so, the break-even may take multiple years, so it is only wise to do so if you plan to stay in your home long term. As an example:
3 Points = $10,500
New Savings with Lower Interested Rate= $325/Monthly Savings
$10,500/$325= 32.3 Months to Break Even
Whether you are in the market for a new home, are hoping to refinance your home and lock in today’s historically low interest rates, or simply are completing some research, understanding the terms used in Real Estate can help lead to a successful sale, purchase or refinance.