How Much is a Mortgage Point?

Mortgage Q&A: “How much is a mortgage point?”

You’ve probably heard the term “mortgage point” get thrown around while searching for a home loan.

If you’re not already aware of what a mortgage point is, it’s basically a percentage point of the loan amount that is charged either for loan originator compensation or to lower the interest rate (prepaid interest).

The former is known as the loan origination fee and the latter is referred to as a discount fee, as it lowers your actual mortgage rate.

So how much is it?  Because a mortgage point is essentially one percent, and not a fixed amount, it will vary based on your particular loan amount.

Let’s look at an example:

Loan amount: $500,000
Mortgage points charged: two

In the scenario above, you’d be charged $10,000 in mortgage points ($5,000 for each point @ 1% X $500,000 = $5,000).

This may seem quite pricey, but it’s not uncommon to see two mortgage points charged on a loan, with perhaps one point charged for loan origination and one point charged to lower your interest rate by some specified amount.

Keep in mind that one mortgage point will not lower your actual interest rate by one percent, it’s usually much less; the ratio can vary greatly from loan program to mortgage lender.

You may also be charged a form of mortgage points on the back-end, which would actually raise your interest rate above the par rate you could have received.

This is typically done to avoid out-of-pocket expenses like typical mortgage points, as the broker or loan officer is paid by the bank instead of the borrower in the form of yield spread premium (YSP).

YSP Example:

Par rate: 6.00%
Adjusted rate: 6.50%

In the above example, the broker takes one point in YSP but doesn’t charge you any mortgage points upfront (out-of-pocket), so your interest rate is a half-percentage point higher as a result.

Remember, it’s important to ask for your mortgage broker or loan officer exactly how many mortgage points are being charged and for what purpose, both on the back and front end of the loan.