points
Upfront fees paid to a lender to reduce the mortgage interest rate, where one point equals 1% of the loan amount.
Example
“Paying 2 points on a $400,000 mortgage cost $8,000 upfront but lowered the rate by 0.5%.”
Memory Tip
POINTS = percentage POINTS you pay upfront to buy down your rate.
Why It Matters
Points significantly affect the total cost of a mortgage over time. By understanding how points work, borrowers can calculate whether paying upfront fees to lower their interest rate will save them money in the long run, which depends on how long they plan to keep the loan.
Common Misconception
Many people assume that buying points always saves money, but this is not true for everyone. Points only benefit borrowers who keep their mortgage long enough to recover the upfront cost through lower monthly payments.
In Practice
On a 300,000 dollar mortgage, one point costs 3,000 dollars upfront and typically reduces the interest rate by 0.25%. If this lowers your monthly payment by 75 dollars, you would break even in 40 months, so points make sense if you plan to stay in the home for more than 3.3 years.
Etymology
From Latin 'punctum' (dot, point) — one POINT equals one percentage point of the loan amount.
Common Misspellings
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Related Terms
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See Also
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