Definition
Points are upfront fees paid on a mortgage loan that lower the interest rate.
Analysis
Points are short for discount points, in which the interest rate is discounted when an upfront fee is paid. Points are expressed as a percentage of the mortgage loan amount.
On a $100,000 mortgage loan, an applicant paying 2 points would have to pay a fee of $2,000 to the lender at the time of closing. This is one of the closing costs incurred by the homebuyer.
Sometimes a mortgage lender will advertise a very low interest rate, only to reveal that the loan charges additional points. The Good Faith Estimate provided by a lender or mortgage broker will show the interest rate and the points on a loan so that the offer can be compared with competing offers.
A homebuyer that expects to sell or refinance the home within a relatively short period of time should avoid loan products with high points. Alternatively, a homebuyer that anticipates living in the home for many years might save money by paying higher points in order to receive a lower interest rate.
