What Are Points and When Should You Pay Them?

Mortgage and Lending

Points are up-front fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, and to compare current rates to historical market trends.

If you take out a $300,000 mortgage and decide to pay one point, this translates into an up-front closing cost of $3,000. Paying a point up front saves $100 a month but it will take 30 months to recuperate the cost of that point. If you decide to refinance or sell the home before the 30-month mark, your money is lost. In this case, you would benefit financially by remaining in the home longer than the 30 months.

Rates run in cycles. When rates are at historical lows, it is sensible to pay points if you plan to live in the home for an extended period of time. It is unlikely that rates will go down; hence, there will be no need to refinance.

When rates are up, there is a strong likelihood that they will come down. This is no time to pay points. The chances of refinancing in the future are extremely high, and you will likely not be in the loan long enough to recuperate the cost of the points.

Mortgage Interest Rates*
Rates as of Monday, 1st December, 2008:
  Conforming APR Payment per
Jumbo APR Payment per
30-Yr. fixed 5.375% 5.509% $5.60 6.125% 6.219% $6.08
15-Yr. fixed 5.250% 5.478% $8.04 5.750% 5.905% $8.30
7-Yr. fixed ARM 6.000% 6.139% $6.00 5.625% 5.716% $5.76
5-Yr. fixed ARM 5.375% 5.509% $5.60 5.375% 5.465% $5.60
3-Yr. fixed ARM 5.375% 5.509% $5.60 5.250% 5.339% $5.52
5-Yr. Interest Only 5.500% 5.635% $4.58 5.625% 5.716% $4.69
*Rates are subject to change due to market fluctuations and borrower's eligibility.
Licensed Mortgage Banker, NJ Department of Banking and Insurance. Corporation also services CO, CT, DE, FL, GA, IN, MA, MD, MN, MI, NC, NH, NY, PA, SC, TN, VA, & RI.

Re-Blogged 1 time:

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  1. Tean Wong 02/19/2010 04:20 AM
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Nancy Larson
I am a licensed referral agent in NJ - Hutchinson Island, FL

Sometimes we forget to explain the difference between Origination Points and Discount Points, do clients understand the difference. Do Mortgage companies use origination points still?

Dec 01, 2008 01:04 PM #1
Karl Peidl
Moorestown, NJ
Accredited Loan Consultant

I don't think most clients understand the difference without a good explanation.  Origination Points are definitely still used.  To add confusion, I've seen what is really an Origination Point called a Discount Point and vice versa.  Maybe not all originators understand the difference either...

Dec 02, 2008 12:23 AM #2
Brian McCarty
Superior Mortgage - Galloway, NJ

Nice post Karl!  I agree that most people do not understand points, the difference between dicount points and origination fees, and for that matter whether they are being charged points by the lender or not.  This is where a little education goes a long way in helping our clients make a good financial decision and end up with the right loan for them.

Dec 03, 2008 11:54 AM #3
Karl Peidl
Moorestown, NJ
Accredited Loan Consultant

Thanks Brian.  We definitely seem to share the same beliefs in our responsibilities to our customers.  Education is such a vital part of what we need to do.

Dec 04, 2008 12:03 AM #4
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Karl Peidl

Accredited Loan Consultant
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