By Rae Oakley, Flyhomes Mortgage
Let’s face it. The mortgage world uses a lot of jargon: APR, prepayment penalties, PMI, HELOCs, debt-to-income … the list goes on. One of the most complicated but important terms for you to know, however, is points, also known as discount points.
A point is a percentage point of your loan (1 point = 1% of your loan amount). When you pay points, you pay a portion of your mortgage’s interest up front as a one-time fee at closing in exchange for a lower interest rate, hence the name discount points.
The opposite of points are credits. By taking a lender credit, you are accepting a higher interest rate over the life of your loan.
Think of it this way: with credits, you receive cash at closing, but you’ll end up paying more in interest over time. Points are the opposite. You pay a fee up front in exchange for greater interest savings over time.
To illustrate this, let’s say you are looking to take out a $400,000 mortgage, and your lender offers you two interest rates:
4.50% interest rate with $2,000 in lender credits
4.25% interest rate with $1,500 in points
With Option 1, you would receive a $2,000 credit at closing to help cover some of your closing costs.
With Option 2, you would have a $1,500 charge on your closing documents in addition to your other closing costs.
Remember, although you receive a credit with Option 1, you’ll end up paying more in interest if you keep your loan for the full term.
By choosing Option 2, you’ll pay a little more at closing, but you’ll reap greater interest savings over the life of your loan.
Whenever you are selecting an interest rate, pay attention to the associated points or credits. You can find this information on your Loan Estimate. Points are on page 2, section A. Credits are on page 2, section J.
Your quoted interest rate will most often come with either credits or points, but sometimes lenders can offer you a rate with no points or credits—this is called the “par rate.”
Whether you take a higher interest rate for a larger lender credit or decide to pay points in exchange for a lower rate is up to you. Consider your financial goals and what makes the most sense for you. We have a calculation you can use to help think through your situation.
If you want help, give us a call! Our mortgage advisors are happy to help you think through your options.