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Writer's pictureJeff Sorg

Understanding the Loan Points: Are They Worth the Cost?

Updated: Oct 3, 2024

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

This article explains loan points and how they can affect your mortgage. Once you understand how they work, you can decide whether points are the right choice.


What are Loan Points?

  • Loan points, or "points," is a fee paid upfront to your lender that lowers your mortgage interest rate.

  • When you buy points, you pay more at the beginning of your loan to save money over its lifetime.


How Much Do Points Cost?

  • One point equals 1% of your loan amount. For example, 1 point on a $400,000 loan would cost $4,000.  

  • You can use whole points or fractions of a point, giving you more control over your financial strategy.

  • Lenders usually charge your points at closing by adding them to your closing costs.


How Do Points Affect My Interest Rate?

  • The more points you buy, the lower your interest rate should be. For example, buying two points on a $ 200,000 loan could reduce your interest rate by 0.5%, saving you about $ 20,000 over the life of a 30-year loan. You'll pay less interest overall by paying more upfront.


Locating Points on Your Loan Documents:

  • Lenders are required to disclose points on your Loan Estimate and Closing Disclosure.

  • Points must be connected to a lower interest rate.


How Much Will My Rate Drop?

  • How much a point reduces your interest depends on the lender, loan type, term, and current market conditions.

  • Sometimes, one point significantly reduces your rate, while other times, it has a more negligible impact.


Is Buying Points Right for Me?

  • Buying points is usually considered a good option if you keep your loan for a long time. This allows you to recoup the upfront cost through lower monthly payments.

  • Check with your lender or financial advisor before deciding to buy points.


It's important to discuss points and their potential impact on your loan with your lender. Your lender's expertise can help you determine if buying points is a sensible choice for your situation, providing reassurance and guidance in your decision-making process.


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(C) 2024 Jeff Sorg

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