What Are Mortgage Points?

Mortgage points are one of the most often-referenced (and most confusing) parts of the mortgage conversation.

Mark James, vice president and executive residential loan officer, has lots of experience making sense of mortgage points and helping families use them as tools to meet their financial goals. We sat Mark down for a conversation to get the full brief on mortgage points: what they are, how they work, and how to use them to your advantage.

What are mortgage points?

One mortgage point is equal to one percent of the loan amount.

What Are Points Used For?

Mortgage points are a way to lower your interest rate percentage by paying a set amount upfront, as part of your closing costs. This upfront payment is commonly known as “buying point(s).” When you see mortgage rates advertised, you may see them described as a set percentage (which controls your monthly payment amounts over time) plus a point or two (which you’d pay for once, up front, when your loan closes).

How much does a mortgage point cost?

A mortgage point costs one percent of your loan amount. So if you’re getting a loan for $500,000, you could buy a point on that loan for $5,000.

How do points work with mortgage rate percentages?

Loan costs depend on lots of factors - from your credit score to your loan amount to your down payment amount - and points are often how loan officers will calculate the increases and discounts they calculate based on a person’s unique situation.

You can also choose to use mortgage points to “buy down” your interest rate, which you’d want to do if a lower interest rate - which can mean lower monthly payments - is important to you.

How many points should I buy?

Points we buy often add up to the biggest chunk of closing costs, so it’s worth thinking carefully about what makes sense for your situation. The most important calculation: when will you hit the break-even point?

Let’s go back to the example of the $500,000 loan. If the base loan rate is 8% on a 30-year fixed-rate mortgage, then payments would work out to about $3,669 each month. If you buy two points for $5,000 each (total $10,000) as part of your closing costs up front, then your new interest rate is 6%... which puts your monthly payments at $2,998.

At a monthly difference of $671, it’ll take about 15 months until the amount you’ve saved on a monthly basis adds up to the amount extra you paid up front when you bought the points to lower your rate. So, if you plan to keep the financing in place for more than 15 months, then you’ll save much more money over time than you spent up front.

Are there situations where buying extra points wouldn’t be helpful?

If you think you’ll make a change before the break-even point on the timeline - like refinancing your loan or reselling the property - then the math may not work in your favor. It’s also a consideration if your closing costs are stacking up beyond the budget you’d put aside in savings.

In any case, there are also other tools that can also help lower your rates and get the best possible monthly payment. A few examples - having a good credit score will help qualify you for the best possible rate; if you can put 20% or more of the purchase price in as a down payment, you can usually get out of paying for mortgage insurance, which also tacks onto your monthly totals.

Our takeaway: each person’s mortgage package is as unique as their individual situations, so the best way to sort out the best path forward is to meet person-to-person with a loan officer you can trust. Make an appointment for a practical, low-stakes conversation about building the mortgage deal that works for you.

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