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What are Mortgage Points and How Do They Impact My Mortgage Loan

1.11.2022 | Category: Homebuying

A common practice among lenders is to charge a mortgage point in order to lower a buyer's interest. Mortgage points can sometimes cause confusion among consumers since they're not always consistently included in a loan's terms. With rates starting to slightly increase among some lenders, adding points to a loan may become a more prevalent practice.

According to the Consumer Finance Protection Bureau, mortgage points lower your interest rate in exchange for paying an upfront fee. By paying points, you pay more upfront, but you’re given a lower interest rate, which can lower your monthly payment and overall cost of your loan.

There are two types of mortgage points:

  • Discount points are points you can buy in advance to lower your mortgage interest rate. Each discount point costs 1% of your loan amount.
  • Origination points are part of the many fees you may pay a mortgage lender as part of your closing costs and can range from lender to lender.

Why Discount Points?

Discount points, or commonly referred to simply as points, allow homebuyers and homeowners to negotiate a lower overall interest rate in exchange for paying a little more upfront. The primary benefit for paying points on your mortgage loan is to reduce your interest rate, and therefore the overall amount of interest you’ll pay over the life of your loan.

Generally, points are incremental and each point can lower your interest rate by 0.25%, although the amount can vary from lender to lender, and even change depending on your overall loan amount.

If you’re refinancing, be sure to discuss the break-even point with your loan officer to fully understand when the amount you save for lowering the interest rate on your loan equals or is a savings more than the cost of the points you will be paying.

Points Are Only a Part of the Picture

While mortgage points can lower your interest rates, and potentially save you money over the life of your loan, points are only a small part of the overall breakdown of mortgage costs, also referred to as origination fees or origination points.

Different from an interest rate, which can be impacted by discount points, origination points are a normal part of the loan and can include application fees, credit checks, title pulls and appraisal fees among others. You can review these fees by carefully looking at your loan estimate or loan statement under, “Origination Charges” and assessing each line item charged under that category.

While origination points can also be negotiated to some degree, it’s important to estimate these costs and understand how these impact your closing costs. Items like administration fees or processing fees may be negotiated with your lender using credits or be waived, depending on your financial situation. Other costs like the credit report fee or title check are charged by third-party providers and can be a little tougher to talk down. 

Whether you're home shopping or refinancing, consider asking for a full breakdown of each origination charge in writing to help you compare and contrast your closing costs.

How to Understand When Taking on Points is a Good Idea

Understanding how mortgage points work is an important factor in deciding if you’re ready to finance a home loan or refinance your existing home loan and is a necessary part of comparing loan rates.

For example, if two lenders are offering you the same interest rate but one is charging a point and the other isn’t, you might be getting a better deal with the lender who isn’t charging a point. However, if you take a careful look at the origination fees and find that one lender is charging much higher origination charges than the other, you might find accepting a point might break even after all.

If you have a strong credit history, and a consistent source of income, you will likely be in a good position to negotiate these fees down across the board. However, sometimes these fees are charged by the lender for accepting the higher risk for approving your loan without strong credit or stable income.

Understanding mortgage points is a crucial part of understanding the costs of your mortgage loan. Once you’ve estimated the costs that you’re comfortable with and you’re ready to be preapproved or consider a refinance, be sure to talk to a Mutual of Omaha Mortgage loan officer first to ensure you’re taking care of and have a full understanding of your loan options.

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