A mortgage discount point is money you pay at closing, as a percentage of your loan. A typical use for points is to obtain a lower interest rate and in exchange for paying some money up front, discount points give you a lower monthly payment.
One discount point is equal to 1% of the mortgage loan amount. For example, if you have a loan of $180,000 then one point would be $1,800. When shopping for a mortgage, you may discover the mortgage points range from 0 to 3, meaning $0 to $3,000 paid up front. Your points are usually a tax deduction in the year they are paid, which is something else to factor into the decision.
When you pay points up front, you get a lower mortgage interest rate. This means your monthly payment will be less than if you had zero points. As a general rule, the longer your mortgage term, the better it is to pay the points. At times, based on your interest rate and points paid, it might not make sense to pay those points unless you plan to stay in your home for 10 years or more. Buying 1 point means your rate will be reduced by 0.125%.
Mortgage origination fees are typically 1% of your loan amount, although they range from 0.75% to 3%. They are sometimes called “origination points”. This is the loan funding fee paid to the lender to cover their costs associated with creating, processing and closing the mortgage transaction.
To calculate a few different scenarios, try this handy discount points vs. mortgage interest calculator.
