Definition:
A point, often called a discount point, is a fee paid directly to the lender at closing to reduce the interest rate on a mortgage. One point equals 1% of the total loan amount.
Example:
If Chris takes out a mortgage for $300,000, buying one point would cost him $3,000 at closing (1% of $300,000). In exchange, his lender reduces his interest rate, lowering his monthly mortgage payment over the life of the loan.
Explanation:
Points allow borrowers to "buy down" their mortgage interest rate. Paying points upfront can lower monthly payments, potentially saving thousands of dollars in interest over time. Each lender sets how much one point will reduce the interest rate, typically around 0.125% to 0.25% per point.
Borrowers choose to pay points based on:
- How long they plan to own the property (longer stays typically mean more savings)
- Available cash at closing
- Desire for lower monthly payments
It's important to calculate how long it takes for the upfront cost of points to pay for itself through monthly savings (the break-even point). Buyers should discuss this carefully with their lender or financial advisor.
Why is Point Important in Real Estate Transactions?
Points matter because they directly impact loan affordability and monthly mortgage payments. For buyers, deciding whether to pay points can significantly affect their long-term financial savings. Understanding points helps buyers make informed decisions and budget accurately for closing costs. Sellers benefit when buyers fully understand their financing options because financially prepared buyers are more likely to complete the transaction without issues. Proper consideration of points leads to smoother, clearer transactions and satisfied homeowners.