How Are Mortgage Points Calculated?

Written by Bill MacDonaldMarch 28th, 20232 minute read

Did you know that mortgage points can lower your interest rate? It's true!

Here's how mortgage points work: Lenders need to earn a certain amount of interest on a loan. Your lender could offer you a 5% interest rate on the loan amount of $100,000 for 30-years — which means you'd pay $93,256 in interest over the life of the loan. Ouch!

But if you're willing (and able) to prepay some of the interest at the settlement, your lender can offer you a lower interest rate.

How Much Are Points on a Mortgage?

A mortgage point is equal to 1% of the loan amount.

The math is simple: Multiply the loan amount by the mortgage points and hit the percentage key on your calculator.

For example, $100,000 x 1% = $1,000.

Interest Rate
30-Year Loan
Cost of Points

Why Pay Points on a Mortgage?

People pay (or buy) points to lower the total amount of interest paid to the lender over the term of the mortgage.

Frequently Asked Questions About Mortgage Points

Are mortgage points bad?

Mortgage points can be beneficial because they reduce the total amount of interest paid to the lender.

But if you're only going to stay in the house for a short time period, then points will work against you.

Are points and origination fees the same?

It depends on the lender. Some lenders understand that home buyers and homeowners have an aversion toward mortgage points, so those lenders will call the discount points an origination fee instead.

However, other lenders will group all of their costs under an origination fee.

Can I get a mortgage on my house if I own it outright?

Provided you (and the house) meet the standard loan qualifications, there is no reason why you can't get a mortgage on the house.

Do points go toward principal?

Points are prepaid interest. Points reduce the interest rate on the loan, not the principal.

Is there a limit on mortgage points?

There is a limit on the number of mortgage points you can have.

The total number of points will depend on the lender and type of loan (e.g., conventional loan, FHA loan, etc.).

There is also a diminishing return with mortgage points. Typically, the value decreases beyond three points.

What are negative mortgage points?

Just as paying points reduces your interest rate, increasing your interest rate will decrease the number of points.

Mortgage points can go negative. For example:

  • 5% + 0 point
  • 5.25% + -1%

Lenders often use the negative points to buy down the closing costs.

Based on the previous example, if the loan amount is $100,000 x 1% = $1,000. The lender uses that $1,000 toward the borrower's closing costs.

Keep in mind that the interest rate was increased to obtain the lender subsidy.

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