By Craig Donofrio | Sep 22, 2019
What are mortgage points? The interest rate your mortgage lender offers you when you buy or refinance a house is not necessarily the rate you have to stick with. In fact, you can lower your mortgage rate by shelling out at closing for something called mortgage points. But what are mortgage points and how can they save you some serious cash (like, thousands of dollars over the years you make monthly payments)? Read on for the answers from loan experts.
What are mortgage points?
There are two types of mortgage points:
- Discount points: These points, also known as prepaid points, lower your interest rate but increase your closing costs, because payment for them is due at closing. Discount points are a kind of prepaid interest you “buy” from your lender, based on your loan amount, for a lower mortgage rate.
- Origination points: These points are charged to recover some costs of the mortgage origination process. This would include compensating your loan officer, notary fees, preparation costs, and inspection fees.
One mortgage origination or discount point typically costs 1% of the loan amount. For example, 1 point on a $250,000 mortgage would equal $2,500.
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