What Are Mortgage Points?

Mortgage Q&A: “What are mortgage points?”

The mortgage process can be pretty stressful and hard to make sense of at times, what with all the crazy terminology and stacks of paperwork.

Further complicating matters is the fact that banks and lenders do things differently. Some charge so-called loan application fees while others ask that you pay points.  Then there are those that tack on fees and points.

While shopping for a home loan, you’ll likely hear the term “mortgage point” on more than one occasion.

Be sure to pay special attention to how many points are being charged (if any), as it will greatly affect the true cost of your loan.

How Much Is a Mortgage Point?

Wondering how mortgage points are calculated?

Well, when it comes down to it, a mortgage point is just a fancy way of saying a percentage point of the loan amount.

Essentially, when a mortgage broker or mortgage lender says they’re charging you one point, they simply mean 1% of your loan amount, whatever that might be.

So if your loan amount is $400,000, one mortgage point would be equal to $4,000. If they decide to charge two points, the cost would be $8,000. And so on.

Clearly a mortgage point can vary greatly based on the loan amount, so not all mortgage points are created equal folks.

Tip: The larger your loan amount, the more expensive mortgage points become, so points may be more plentiful on smaller mortgages if they’re being used for commission.

There Are Two Types of Mortgage Points

There are two types of mortgage points you could be charged when obtaining a mortgage.

A mortgage broker or bank may charge mortgage points simply for originating your loan, known as the loan origination fee.  This fee may be in addition to other lender costs, or a lump sum that covers all of their costs and commission.

For example, you might be charged one mortgage point plus a loan application and processing fee, or simply charged two mortgage points and no other lender fees.

Additionally, you also have the choice to pay mortgage discount points, which are a form of prepaid interest paid at closing in exchange for a lower interest rate.

They are used to buy down your interest rate, assuming you want a lower rate than what is being offered. Generally you should only pay these types of points if you plan to hold the loan long enough to recoup the costs via the lower rate. These types of mortgage points are tax deductible, seeing that they are straight-up interest.

*The loan origination fee may also be tax deductible if it’s expressed as a percentage of the loan amount and certain other IRS conditions are met.

If you aren’t being charged mortgage points directly (no cost refi), it doesn’t necessarily mean you’re getting a better deal. All it means is that the mortgage broker or lender is charging you on the back-end of the deal. There is no free lunch.

In other words, the lender is simply offering you an interest rate that exceeds the par rate, or market rate you would typically qualify for.

So if your particular loan scenario had a par rate of say 6%, but the mortgage broker or bank could earn two mortgage points on the “back” if he/she convinced you to take a rate of 6.75%, that would be their yield-spread-premium (YSP), or commission.

Banks can offer mortgages without points as well because of the “service release premium” (their form of YSP), which is a fee they earn when they sell their loans on the secondary market.

Sure, you might not pay any mortgage points out-of-pocket, but you will pay the price by agreeing to a higher mortgage rate than necessary, which equates to a lot more interest paid throughout the life of the loan.

Before YSP was outlawed, this was a common way for a broker to earn a commission without charging the borrower directly. Nowadays, brokers can still be compensated by lenders, but not for offering you a higher mortgage rate than what you qualify for.

If they do offer you a higher rate, the mortgage points involved act as a lender credit toward your closing costs.

Let’s look at some examples of mortgage points in action, shall we:

Say you’ve got a $100,000 loan amount and you’re using a broker. If the broker is being paid two mortgage points from the lender at par to the borrower, it will show up as a $2,000 origination charge (line 801) and a $2,000 credit (line 802) on the HUD-1 settlement statement. It is awash because you don’t pay the points, the lender does. However, a higher mortgage rate is built in as a result.

Now let’s assume you’re just paying two points out of your own pocket to compensate the broker. It would simply show up as a $2,000 origination charge, with no credit or charge for points, since the rate itself doesn’t involve any points.

Regardless of the number of mortgage points you’re ultimately charged, you’ll be able to see all the figures by reviewing the HUD-1 (lines 801-803), which details both loan origination fees and discount points and the total cost combined.

Mortgage Points Cost Chart

Mortgage Points Chart

Above is a handy little chart I made that displays the cost of mortgage points for different loans amounts, ranging from $100,000 to $1 million.

As you can see, a mortgage point is only equal to $1,000 at the $100,000 loan amount level. So you might be charged several points if you’ve got a smaller loan amount (they need to make money somehow).

At $1 million, you’re looking at $10,000 for just one mortgage point.  And you wonder why loan officers want to originate the largest loans possible…

Generally, it’s the same amount of work for a much bigger payday if they can get their hands on the super jumbo loans out there.

Be sure to compare the cost of the loan with and without mortgage points included. Also remember that mortgage points can be paid out-of-pocket or priced into the interest rate of the loan.

Also note that not every bank and broker charges mortgage points, so if you take the time to shop around, you may be able to avoid mortgage points entirely while securing the lowest mortgage rate possible.

Read more: Are mortgage points worth paying?


15 Comments

  1. Phil February 19, 2013 at 10:52 pm -

    I recently purchased my first home and on the HUD-1 form there is nothing on line 802 with and origination fee listed on 801 and 803 (identical). However, I did receive a 1098 from the lender list a point paid for the purchase, so do you know what is doing on here? Am I getting changed points first in the origination fee and then again on a deal with the lender?

  2. Colin Robertson February 20, 2013 at 9:42 am -

    Phil, line 801 is the origination charge, and line 803 is your adjusted origination charge. They were the same, not double, because you didn’t pay discount points or receive a lender credit, which is why line 802 is blank.

  3. Christina June 23, 2013 at 5:49 pm -

    Thanks for breaking it down. I thought you always had to pay points out of pocket no matter what.

  4. Allie August 2, 2013 at 10:35 am -

    It seems to me that paying a mortgage point does very little to actually lower your interest rate. My broker told me I had to pay a full point just to lower the rate .25%. Doesn’t seem to be a very good deal.

  5. Bob December 12, 2013 at 3:45 pm -

    I recently purchased a home and received a lender credit of approx. 10K. They charged an orig. fee of $6400, leaving me with an adjusted orig fee of -approx $3600 (credit). I am allowed to claim reimbursement for my move for “expenses actually incurred” to include orig. fee. I’m told this fee is not going to be allowed since I got a credit and did not incur the expense. Although I am allowed to be reimbursed commision on the sale of a property (because it “affected my bottom line”) I was told. Didn’t the orig fee also affect my bottom line using this line of thinking? I know I didn’t write a check at closing, but didn’t I still get charged $6400? Thanks for helping me understand if my though process is crooked.

  6. Colin Robertson December 13, 2013 at 12:17 pm -

    Bob,

    Yes, it sounds like you were charged $6,400 for taking out the loan, though you didn’t actually pay it out-of-pocket. It was covered via the lender credit, and the presence of the credit resulted in a higher-than-market interest rate in return. However, I’m not sure how the military defines “expenses actually incurred,” or reimbursements for that matter.

  7. Janet January 17, 2014 at 9:25 pm -

    I was recently charged 2.5 points for my refinance, so it pays to read your loan paperwork and comparison shop. I think I could have done a lot better. Note: They didn’t charge me any other fees, so I guess that was the tradeoff.

  8. Eunice January 18, 2014 at 10:02 am -

    Is there a customary number of mortgage points one should pay when taking out a mortgage? Like an average? Thanks.

  9. Colin Robertson January 18, 2014 at 10:30 am -

    If you’re talking about mortgage points for commission, many banks will charge 1 point. However, as noted in the post, depending on the size of the loan, lenders may need to charge more or less to cover their costs and make money. And some may charge no points directly to the borrower. So it really depends. Just look for the best combination of points, rate, and fees to ensure you’re getting the best deal.

  10. Flora March 3, 2014 at 7:11 pm -

    My broker said he wasn’t charging me any points, but I still see loan origination charges and a negative number in the adjusted charges section of the Good Faith Estimate.

  11. Colin Robertson March 4, 2014 at 12:22 pm -

    It appears as if you were charged points, but they’re covered by credits, meaning you didn’t pay for them out of pocket. But again, took a higher interest rate to compensate.

  12. Chris Berry March 24, 2014 at 6:14 pm -

    Line 801 lists an origination charge of 13650
    Line 802 lists a credit of 12510
    Line 803 lists adjusted origination charge of 1140

    What can I write off the full 13650 or only what the adjusted origination charge lists?

  13. Colin Robertson March 24, 2014 at 9:13 pm -

    No one seems to have a straight answer on this, but hopefully a tax expert or your CPA can provide a definitive answer. Some say you can use adjusted origination, but if that figure includes things like processing and underwriting fees, those aren’t really points. For the record, the credit results in a higher interest rate, meaning more interest will be paid by you over the life of the loan and potentially deductible each year you pay your mortgage. There’s a lot of confusion about this from what I’ve seen and even the IRS doesn’t seem to explain it very well.

  14. Willie H. September 19, 2014 at 9:28 am -

    Colin,

    If we refuse the credit does that require the bank/lender to reduce the interest rate and disclose the reduced rate? We applied for a refinance 4 months ago with our current bank/lender and the credit was higher when we received the original GFE but were told that because the extended duration (not because of the borrower; both have excellent credit and bank with the lender) that the rate and amounts changed and the credit is less. The interest rate remains 4%/3.956% APR.

    Original:
    801: $955
    802: $2,718.24
    803: $1,763.24

    New:
    801: $955
    802: $2,431.71
    803: $1,476.71

  15. Colin Robertson September 19, 2014 at 2:17 pm -

    Hey Willie,

    That’s normal. Rates and credits can change day to day as the market dictates. You can ask what your interest rate would be without the credit. But if it doesn’t lower your rate, or it only does so marginally, you might also consider using it to offset closing costs. Ask them to present a few scenarios with and without the credit and go from there.

Leave A Response