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What Are "Points" on a Mortgage?

You may have had some advice to “never pay points” or to “watch out for the points” on a mortgage. Chances are if you got that advice it was probably from someone who knows little about mortgage financing. Now that I have your attention …

There are different types of points so saying “points” simply generalizes a term that is dangerous mostly when generalized and not comprehended. In this very short article I will talk about four different kinds of points and none of this is intended to be a concise guide or to take the place of speaking with a seasoned mortgage broker.

What is a “point”?

In high finance there are basis points which are each 1/100th of 1 percent.? So that means 100 basis points, also called bips, is 1 percent. You may hear people refer to 50 bips or 50 basis points when referring to 1/2 of 1 percent. One full point, 100 basis points, is 1 percent.

Interest points and other points associated with a mortgage are calculated in bips and points. When speaking with customers regarding interest rates the mortgage broker may use percent and say it in English like four and three quarters percent (4.75%). While speaking about points that are not related to the rate they will most likely say points.

Closing Points

This is a generalization usually applied to closing costs. People will often mean this when they ask “what are the points”? Mortgage brokers know there is no such term so they will either assume the asker is mimicking terms they have learned or are genuinely not familiar with the terminology. Closing points could be loosely used to translate to closing costs which are comprised of points, fees and associated escrows. Closing points is not a real term.

Discount Points

Have you ever noticed one advertiser may say interest rates are one number and another will say a much lower number for the same loan. This is almost always a result of something called “discount points”. These points amount to pre-paid interest and this is where the tricky advertiser can beat the uninformed customer.

Discount points are not bad and in fact can work to a home owner’s advantage when properly understood, disclosed and used. Proper disclosure should start with advertising or at the very least the first phone call. Discount point, in other words, can be used to your benefit or detriment. Working with an experienced mortgage broker and not one of the phone operators at the bigger lenders you should be given all the facts and allowed to choose whether or not you want to use discount points – you should never be presented with an initial rate quote that would require the payment of discount points.

Broker Points

Most brokers no longer charge broker points although I did see a good faith estimate a few weeks ago with 2 broker points. That was a fee that goes straight to the broker of 2 percent of the loan amount. Now that may be okay if there are limited other closing costs but in this case all other fees were present so be careful with broker points. Broker points can be used by the broker to pay for the appraisal, attorney fees, other points or for any other purpose the broker deems reasonable and to which you agree.

Origination Points

Almost every lender, broker and banker has an origination fee. This fee is almost exclusively used to pay salaries, commissions, and other costs of running a business. Once again these are expressed in points or percentage so if your mortgage broker says the origination fee is 1 point they mean it is 1 percent of the loan amount.

Those are the three types of points you should expect to see associated with your loan. There are other costs but generally not expressed in points or percentage. Attorney fees, appraisal fees, title fees, inspection and other fees may also appear in association with your loan.

Make sure you read my other articles and especially the one on How To Shop For A Mortgage.