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  • Writer's pictureJeff Sorg

Understanding the Loan Points: Are They Worth the Cost?

Updated: 5 days ago



homebuyers reviewing their loan disclosure statement for paid loan points and reduced interest rate

This article aims to explain the concept of loan points and how they can influence your mortgage. By understanding how they work, you can decide whether points are the right choice for you.


What are Loan Points?

  • Loan points, also known as "points," are fees that you pay upfront to lower your mortgage interest rate.

  • In simpler terms, you pay a little more at the beginning of your loan to save money over its lifetime.


How Much Do Points Cost?

  • One point is equal to 1% of your loan amount. For instance, a point on a $100,000 loan would cost $1,000.

  • You can even buy fractions of a point, which allows more flexibility. Lenders usually charge points at closing and add them to other closing costs.


How Do Points Affect My Interest Rate?

  • The more points you buy, the lower your interest rate should be. This means you'll pay less interest overall, even though you pay more upfront.


Locating Points on Your Loan Documents:

  • Lenders must legally disclose points on your Loan Estimate and Closing Disclosure.

  • Points must be connected to a lower interest rate.


How Much Will My Rate Drop?

  • The reduction in interest rate for each point varies depending on the lender, loan type, term, and current market conditions.

  • Sometimes, one point might significantly reduce your rate, while other times, it might have a smaller impact.


Is Buying Points Right for Me?

  • Points are a good option if you plan to keep your loan for a long time. This allows you to recoup the upfront cost through lower monthly payments.


Talking to your lender about points and how they might affect your loan is best. They can help you determine if buying points makes sense for your situation.


END

(C) 2024 Jeff Sorg

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