Why People Pay Points
There are two types of mortgage points: origination points and discount points.
What are origination points?
Origination points are a fee borrowers owe their loan provider and are generally negotiable, based on credit history and loan amount. Other companies may charge origination fees. As a direct lender, Loan One, a division of The Union Bank Company, never charges origination fees.
What are discount points?
Discount points are a form of pre-paid interest on a loan; one point is equivalent to one percent of the interest of the mortgage amount (So one point on a $150,000 mortgage is $1,500). Discount points are tax deductible in the year they are purchased and can be beneficial for both the borrower and the loan provider. The loan provider will benefit from receiving cash up front, and if the borrower holds on to the mortgage long enough they will benefit from lower interest rates in the future. Depending on market conditions, for every one point (1% of your mortgage), a borrower buys generally lowers the interest rate on a mortgage between 0.2 and 0.5%. It’s important to discuss with your mortgage banker whether paying points is right for you, as ever situation will vary. Most lenders allow borrowers to purchase anywhere from zero to three discount points and many times the advertised rates you see include the purchase of discount points.
Many homebuyers pay points if they plan to stay in their home for a long time and will see a huge benefit from the reduced interest rates down the line. Homebuyers who purchase discount points up front will not see a savings on interest rate payments for years into their mortgage which make discount points a good alternative for long-term homebuyers but probably not the best option for short-term homebuyers and investors.
Although pre-paying interest on a loan is appealing for most homebuyers, coming up with the extra money to buy them along with the down payment and other fees might not be possible. For this reason you can use a mortgage calculator to see if purchasing points is a worthwhile investment for you and if you will be able to afford it up front.