Understanding Points

by Matthew Perry
(last updated February 21, 2009)

"Points" is a tricky term. In most popular sports, points are undeniably a good thing, whether they're called goals, baskets, or touchdowns. In mortgage lingo, however, points are a little more ambiguous. Depending on how the word is used and on your preferences, points can be nifty bonuses or the bane of your existence. Almost.

Whichever way they're used, bonus or bane, points do have a standard definition. One point is one percent of your total loan amount; if you're borrowing two hundred thousand dollars, one point is two thousand dollars. Beginning with the negative usage, mortgage lenders charge a certain number of points at the beginning of the loan process as a fee—the number of points changes with the lender and the agreement, but it's always higher if you have bad credit.

However, after all the unpleasantness of obligatory points, you have the option of paying extra points, and there is a good reason to do that. I call these "discount points" because for every one you pay, you get a discount on your interest rate. However, the ratio is not one for one—one discount point does not equal one less interest point. Instead, one discount point is usually equal to about a fourth of an interest point. Most lenders have a cap on the number of discount points you can buy, but lowering your interest rate by even one percent can make a big deal over the life of your loan.

When you're reading the paperwork for your loan, be sure to pay attention to the meaning behind the word 'points.' Also keep in mind what you could do with your money if you don't buy extra points. If you're a hot and heavy investor who has a better use for that money, you may be able to find a more lucrative way to spend your money. Being more of a stock market observer than an actual player, I find the idea of discount points enticing.

Author Bio

Matthew Perry

MORE FROM MATTHEW

Is Bankruptcy Right for You?

Declaring bankruptcy is a big step. Don't do it unless you're sure it's the best thing for your unique situation.

Discover More

Reducing Bank Fees

Tired of being "nickel and dimed" by your bank? There are ways you can reduce your bank fees, as described in this tip.

Discover More

What Should Be In My Safe Deposit Box?

With only a certain amount of space, it makes sense to be careful with the items you select for your safe deposit box. ...

Discover More
More Money Tips

Lowering Your Mortgage Rate

There are several reasons to lower your mortgage rate. Before signing on the dotted line, be sure that the fees justify ...

Discover More

Reducing Your Mortgage

Reducing your mortgage may seem difficult, but if you know the right ways to go about it, then you can meet with pleasing ...

Discover More

What Are Subprime Mortgages?

A subprime mortgage is the type of mortgage given to borrowers with credit scores below 620. You can avoid the high fees ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] in your comment text. You’ll be prompted to upload your image when you submit the comment. Maximum image size is 6Mpixels. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is eight more than 3?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)