Are Mortgage Points Good or Bad?

June 27, 2011 No Comments »

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Mortgage Q&A: “Are mortgage points good or bad?”

First off, a mortgage point is defined as a percentage of the loan amount, so if you take out a $150,000 mortgage, one mortgage point would be $1,500.

[See how much is a mortgage point for more on that.]

Secondly, there are different definitions of a mortgage point, as both mortgage discount points and loan origination fees are often thrown under the same umbrella.

But they’re quite different.

A mortgage discount point is pre-paid interest included in closing costs that lowers your mortgage rate. This occurs when you buy down your interest rate.

A loan origination fee is a fee that covers certain closing costs and the loan officer or mortgage broker‘s commission.

Both of these charges are avoidable, assuming you don’t want to buy down your rate, or if you take out a no cost loan that has no closing costs, only back-end lender-paid commissions.

All that said, mortgage points aren’t necessarily good or bad, depending on which type we’re talking about, and also what the situation is.

Obviously, the less you pay the better, right?

But if you pay less at closing and more over the life of the loan thanks to a higher mortgage rate, you’re not paying less.

So for those who plan to stay in their home for the long-haul and pay off the mortgage, paying mortgage discount points could be considered a “good” move.

Conversely, if you plan to stay in your home for just a short period, or think you’ll refinance again in the near future, paying mortgage points is probably bad news.

When it comes to loan origination points, the less the better. This is essentially just more commission for the originating bank or mortgage lender, so be sure to negotiate hard on those fees.

Sure, the entity originating your mortgage needs to get compensated for their work, but be sure you know how much they’re getting and why.

Read more: How much do mortgage brokers make?

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