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A Quick Guide to Understanding Mortgage Points

We always advise our buying clients to “shop” for their loan just as they would “shop” for their home.  The same amount of care must go in to comparing interest rates, fees and mortgage points among lenders as would go into comparing home location, cost of utilities, taxes, age of appliances and roofs…just to name a few.  Interest rates and fees are obvious.  Mortgage points are not.  What are they?  Are they necessary?  These are questions many buyers have when purchasing a home.

Although we are not loan officers and always recommend you discuss your questions with your loan officer and financial advisor, here are a few tips we’ve found helpful to our clients.

There are two types of mortgage points – loan origination points and discount points.

Origination points are charged by lenders to cover the cost of processing the loan.  Some lenders charge loan origination points and some do not.  It’s always good to ask.  One point equals one percent of your loan amount.  For example, on a $200,000 mortgage, one point is $2,000.  You may be able to negotiate a reduction or deletion of these points.  Just make sure if a lender reduces the loan origination fee they don’t increase the interest rate to cover it.

Discount points are added to your closing costs or rolled into the mortgage to lower your interest rate.  When buying discount points, you are essentially prepaying interest. One point equals one percent of the loan amount – about a quarter of a percent of your interest rate.  The reduction in the interest rate is typically 1/8 to 1/4 percent.  Discount points may be tax deductible.  Please confirm with your tax advisor.

It’s always a good idea to compare mortgage rates and fees and negotiate the best scenario for you.  Mortgage points are not for everyone and can depend on how long you plan to own the home or the amount of your down payment.  Here are a few general rules of thumb:

  1. Paying for discounts points makes more sense if you plan to be in the home for a longer period of time.  You’ll have time to break even and save money over the loan’s lifetime.
  2. If money is tight and coming up with your down payment is a challenge, not adding the cost of the discount points may be the best decision for you.

If you would like more information about buying, selling, or investing in Virginia or Washington DC, contact me at [email protected] or 703-798-1803.  I would be happy to share our Magnificent Manors Buyer’s Guide to finding the right home or meet with you to show you our unique approach to preparing your home and list price to command the best price in the shortest time.

Marybeth Fraser is Team Leader of The Magnificent Manors Team of KW Mtro Center. She is an MBA, Realtor®, Accredited Staging Professional® and Certified Luxury Home Marketing Specialist®.