What are “Points” on a Loan?

If you’re looking to buy your first home, and are new to the real estate game, then you’ve probably heard people discuss points, and you’re not too clear on what they are. Points are, essentially, a form of prepaid interest on your mortgage loan. A point usually equals one percent of the loan.

When a lender charges you, the borrower, points on your mortgage loan, the lender is making more money on the loan beyond the total of the interest rate. It will benefit the borrower, because by paying points, you’re lowering the interest rate on the loan, and so you’ll have a smaller monthly payment to make. When you pay points on your mortgage loan, you’re essentially making a big down payment on your loan in order to get a better interest rate, which will benefit you in the long run. So paying points is really a question of delaying gratification, because at some point in the time span of your mortgage loan, you’re going to reach a moment of equilibrium where the amount of money you spent on paying points equals the money you’ve saved by paying the lower interest rate. Once you get past that moment you’re saving even more money.

If you happen to sell your home before you reach the moment where savings on monthly payments equals the amount spent on points, you’re going to lose money on the purchase of the points. So it’s somewhat of a risk to buy points up front, because if you sell your home before the savings are fully realized, you’ve lost money.

Buying a home is a complicated affair, so before you do anything, be sure to sit down with a real estate expert or a trusted financial adviser and go over the process in as much detail as possible, so that you feel comfortable that you’re making the right financial decisions.