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What are Points?

In a mortgage, “points” are upfront fees expressed as a percentage of the loan amount. One point equals 1% of the loan amount. So on a $500,000 loan, 1 point = $5,000, and 0.50 points = $2,500.  The important part is that not all points mean the same thing.

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Discount Points

Discount points are generally paid to buy down the interest rate. You pay more upfront in exchange for a lower rate and usually a lower monthly payment.

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For example, suppose you’re comparing:

  • 6.50% with 0 points

  • 6.25% with 1 discount point

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On a $500,000 loan, that 1 point costs $5,000. The question becomes: How long will it take for the monthly savings from the lower rate to recover that $5,000? If you plan to sell or refinance before reaching that break-even point, paying the discount point may not make financial sense.

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Origination Points

Origination points are different. They are generally a fee charged for originating, processing, underwriting, or arranging the loan. Paying an origination point does not necessarily mean you are getting a lower interest rate.

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For example, a lender might advertise:  “6.25% — 1 point”.  But that “1 point” could be a discount point, an origination charge, or a combination of both. That distinction matters.

 

On a $500,000 mortgage:  1 discount point = $5,000 used toward obtaining the advertised rate. 

1 origination point = $5,000 charged as compensation/loan cost.  You could even have both on the same loan.

 

Why the Fine Print Matters

This is where borrowers can get misled by advertisements. A lender may advertise an extremely attractive interest rate in large print, while the smaller print says something like:

 

“Rate assumes 25% down, 780 credit score, owner-occupied single-family residence, $750,000 loan amount, and payment of 2 discount points.”

 

That advertised rate may therefore cost thousands of dollars upfront and may not apply to the average borrower.

 

When comparing mortgage quotes, don't compare rate alone. Look at the entire transaction:

  • Interest rate

  • Discount points

  • Origination charges

  • Lender fees

  • Lender credits

  • APR

  • Loan amount

  • Monthly principal and interest

  • Cash needed at closing

  • How long you expect to keep the loan

 

A lender offering 6.25% with $10,000 in points and fees isn't automatically giving you a better deal than a lender offering 6.375% with little or no lender cost.  And one particularly important distinction: APR can help reveal the cost of points and certain lender fees, because APR incorporates many finance charges into the calculation. It isn't perfect for every comparison, especially if you're likely to refinance or sell early, but a big difference between the note rate and APR is a reason to look closely at the fees.

 

Bottom line

When someone says, “I can get you 6.25%,” the next question should be:  “Are there any Points on this loan?”

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That's why reading the fine print on mortgage advertisements and reviewing the actual Loan Estimate is so important.

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