How Do Points Work?

What is a point? A point is a loan fee equal to one percent of the loan amount. In "lender language", there are two kinds of points: discount and origination points. A discount point is a loan fee that reduces the loan's interest rate. An origination point is a loan fee that represents the lender's profit for "originating" the loan.

Let us consider a typical rate: six percent 0+1. Translated, this means that the interest rate of 6 percent costs you zero discount points and one origination point. If you would like a lower interest rate, you can "buy it down" with one or more discount points. A lower interest rate can be a benefit if you would like to qualify for a larger loan. On the other hand, paying discount points may be an unwise investment if you refinance or sell your home in the early years.

A one percent origination point is typical. However, if you wish to minimize your closing costs, it can be waived if you accept a slightly higher interest rate.

Both origination and discount points are paid at closing, usually by the buyer. A seller or new home builder may pay a point or two to reduce the buyer's closing costs or help the buyer qualify for a larger loan.

Loan programs, interest rates, and fees vary from one lender to another, so it is wise to interview at least three lenders. Be sure to get a good faith estimate, in writing, of all fees and loan closing costs.

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