One of the most common questions home buyers have while obtaining a mortgage for a newly purchased home is, "What are points?"
The answer - Each point or discount point, as real estate professionals and mortgage lenders often refer to them, are equal to 1% of the loan amount. For example, on a $100,000 loan, one discount point equals $1,000. And ½ discount point for the same loan would be $500.
Points are paid to a lender at closing in order to lower the mortgage interest rate. Although "discount points" are a part of your closing costs, they are not considered loan fees. Discount points are an optional way to buy the interest rate up or down.
Buyers sometimes wonder how much buying a point will lower the interest rate? Typically, each point paid on a 30-year loan will lower the interest rate by 0.125%. That means a 7.5 percent rate would be lowered to 7.375 percent.
Depending on how much lower of an interest rate you wish to obtain, the more discount points you will be required to pay.
Usually if a buyer is going to retain ownership of their home for a period less than 3 - 4 years, the benefit from paying points, to buy down the interest rate, doesn't compute in savings. However, for a long-term homebuyer, the savings from paying points at the origination of the loan, can become significant over the course of years of ownership in the home.
If you are a homebuyer, feel free to query your Real Estate Professional with your questions about real estate loans and mortgages.