A mortgage point is equal to one percent of the loan. If you get a mortgage for $100,000, then one point is worth $1,000. Points are paid by the borrower at the time of closing, and there are two different kinds:
- Discount points are a fee that you can pay at closing to get a lower interest rate. If you pay one discount point, then your lender will give you a lower interest rate. Pay two points and it is lower yet. And so on. Most lenders will allow up to four discount points. You pay more dollars at closing, but end up paying less over the course of the mortgage. The choice to pay these optional discount points is a choice that every borrower will have to make on an individual basis, depending on his financial circumstances. If you plan on staying in the house a long time, then you will do better paying the discount points, if you can. Your lender should be able to provide you with an amortization table that shows the effects of paying such discount points or not. Or use this amortization table.
- Origination points are fees you pay at closing just to get the mortgage itself. You might have to pay some points to the lender just for the privilege of getting the mortgage. Aside from allowing you to get the mortgage, you get no benefit from origination points. They are just a fee you might have to pay to the lender. Naturally, most borrowers prefer to get a mortgage with no origination points.