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Mortgage points are fees lenders charge in exchange for a lower interest rate. They’re commonly called discount points, and each point is equal to 1 percent of the loan amount.
Some loan programs require you to pay a minimum amount of points. To decide whether you should pay additional discount points to obtain a lower interest rate:
1. Figure out how much money you have to put down at closing.
2. Consider how long you plan to stay in your home. (It can take several years to break even on purchasing points.)
3. And compare the points’ cost to the amount of money you would save each month by paying a lower interest rate on your loan.
If, for example, you took out a $300,000 conventional 30-year loan and paid for 1.125 mortgage points, it would hypothetically cost you $3,375 up front, your interest rate would be 4.375 percent, your annual percentage rate (APR) would be 4.534 percent and your monthly payment would be $1,620.36.
Comparing that with a 0-point loan, your interest rate would be 4.625 percent, your APR would be 4.788 percent and your monthly payment would be $1,645.75.
In the hypothetical example illustrated above, by purchasing points, you would save $25.39 a month or $304.68 a year. Over the course of a 30-year loan, you would save $5,765.40 (after taking out your initial cost for the discounted rate).
So if you plan to stay in your home long-term, it would be worth purchasing the 1.125 mortgage points or more, if you had the funds available to put down at closing.
These estimates are provided for illustrative purposes only. The information contained in this document is not guaranteed or binding and does not constitute an offer to extend credit. Payment estimates don’t include taxes and insurance (if applicable) and an actual payment obligation would be greater. Get an official loan estimate before choosing a loan.
Note: Some lenders charge origination points or fees to cover processing costs. Bell Bank does not charge origination fees, which could save you money if you qualify and means you would need less cash at closing. This also allows us to tailor loan options specific to your goals, finances and what you need in a mortgage.
Have more questions? Check out our mortgage Q&A resource or give one of our mortgage experts a call!