Our borrowers will often ask their agent, “Are mortgage points good or bad?” For starters, let’s define “points,” as they are often misunderstood. A mortgage point is defined as a percentage of the loan amount, so if you take out a $150,000 mortgage, one (1) mortgage point would be $1,500. That is pretty simple, but there are different definitions of a mortgage point, as both mortgage discount points and loan origination fees are often thrown under the same umbrella and they are not the same nor treated equally.
A mortgage “discount point” is pre-paid interest included in closing costs that lowers your mortgage rate. This occurs when you buy down your interest rate. A loan origination fee is a fee that covers certain closing costs and the loan officer’s commission.
With that in mind, the fewer points you pay the better, right? Not necessarily - if you pay less at closing and more over the life of the loan thanks to a higher mortgage rate, you’re not paying less. Our agents will tell our clients that for those who plan to stay in their home for the long-haul and pay off the mortgage, paying mortgage discount points could be considered a good move. Conversely, if our borrowers plan to stay in their home for just a short period, or think they’ll refinance again in the near future, paying mortgage points is probably bad news.
When it comes to loan origination points, paying less is usually better. This is essentially just more commission for the originating bank or mortgage lender, so be sure to discuss fees with your agent. But often a particular loan is more complicated than another, and requires more processing and/or underwriting time. The lender needs to be compensated for their work, but be sure you know how much they’re getting and why.
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