Nothing says safety and security like owning your own house. Buying a home is central to the American Dream, and just about everyone wants, at some point, to own one. Given the recent economic collapse, with its epicenter in the real estate industry, now is a very good time to buy for anyone who can afford it.
If you’re in the midst of the mortgage loan process, or are just beginning to consider buying property, you’re going to need to understand how a home loan works. One term that is critical to understanding mortgages is the “point.” Understanding mortgage points can help you better evaluate mortgage terms and conditions to find the one that suits you best.
What Are Points on a Mortgage?
Mortgage points are representative of the cost of a home loan in addition to the loan interest rate, and are based on the size of the mortgage.A mortgage point is equal 1 percent of the total loan amount. So, if you’re getting a home mortgage loan for $100,000, one point is $1,000.
Points can be used in two different ways: As loan origination points or as discount points.
Loan Origination Points on a Mortgage
Loan origination points are points charged by the bank, credit union or other lending institution that is financing your home purchase. Loan origination points represent the additional fees associated with your mortgage (like loan origination fees).
Again, mortgage points are separate from the loan itself — when you pay points, they are in addition to paying the interest rate on your principal loan. Also, you can’t write off mortgage points on your taxes like you can the interest. If you can, avoid a loan offer that has origination points attached to it.
Discount Mortgage Points
Discount mortgage points represent prepaid interest on your loan. The more points you pay ahead of time, the lower your interest rate will be. So, you can pay these discount points up front in order to get a lower interest rate on your mortgage.
To determine whether you should agree to a home loan that charges mortgage points, or prepay interest on your loan using discount points, speak with a financial professional who is familiar with your situation.
This article is part of the Go Banking Rates Financial Literacy Movement, helping Americans get smarter and grow richer. Take our mortgage quiz to test how knowledgeable you are!