If you’ve ever considered purchasing a home, there are some terms that you might hear during the loan process that sound unfamiliar, such as “mortgage points” or “discount points.” Points are optional fees that you can pay upfront to lower your interest rate – a strategy called “buying down the rate.”
What exactly is a point?
One point equals 1% of your loan amount. For example, if you purchase a $500,000 home with a 20% down payment, your loan amount would be $400,000. One point would be equal to $4,000.
How do discount points work?
Discount points reduce the interest rate on your mortgage. The more points you buy, the lower your interest rate can drop. You’ll see these points listed on your Loan Estimate under loan origination fees. Keep in mind: lenders may charge other origination fees that do not lower your rate – those are listed separately.
Example
- Loan amount: $400,000
- Interest rate: 6.50% → Monthly principal & interest: $2,528
- After buying 1 point (cost: $4,000): Rate drops to 6.25% → Payment: $2,462
- Monthly savings: $66
Why consider buying points?
Paying for discount points can lower both your APR (Annual Percentage Rate) and your monthly mortgage payment. APR reflects the total cost of your loan over time, including interest and certain fees. When you buy points and reduce your interest rate, your APR typically decreases as well. This can result in significant savings over the life of your loan. Buying points may be a smart investment if you plan to stay in your home for several years. If you plan to move or refinance soon, keeping your cash on hand may be a better choice.
Regardless of your situation, understanding mortgage points can help you make confident, informed decisions when choosing the right mortgage for your first home. At Hawaii State FCU, our Mortgage Loan Officers are here to guide you through the homebuying process and explain all your financing options. Stop by any branch or contact us today!
* This information is for educational purposes and is not a commitment to lend or an offer of credit. Any rates, payments, or figures shown are hypothetical examples for illustration. Actual loan terms vary based on credit qualifications and current pricing.
