This term refers to a fee charged in a loan transaction and comes in two types: Discount Points and Origination Points. In itself, it is a shortening of the phrase 'percentage point' and is used to refer to a Percentage Point of the Total Loan Amount. For example, 2 Points on a loan amount of $200,000 would be $4,000.

WHEN PAYING POINTS MAKES SENSE: Paying Discount Points permits a borrower to Buy Down the Interest Rate to 'below market' levels and can be a fantastic investment. For example, if paying 2 Points were a cost of $2,000 and saved you $500 a year in payments you would have a 'return' of 25% annually on your investment. This is a 25% guaranteed return for the life of the loan. Any stock brokerage offering that kind of deal would have a mile-long line out of their front door...

Why is it possible to buy down a point? Because lenders sell your mortgage in the 'secondary market'. If you have a mortgage you have likely experienced this before: opening a piece of mail notifying you that a 'new bank' now holds your mortgage. This, again, is because lenders often sell your loan. Naturally, the interest rate of your loan affects how much they can sell your loan to an investor for...the higher the rate, the greater the profit (all other things being equal). Providing you a lower rate means they will have to sell the loan for less in the secondary market; so a lender makes up the difference by charging borrowers Discount Points.



IMPORTANT NOTE: Some types of morgages require points to be paid and these points are neither for origination or for discounting. These points are paid as 'hits' for particular circumstances that a lenders consider to be risky by nature. These 'hits' are generally associated with Investment Properties, High Loan to Values, and 'Low Documentation' programs. It is important that any of these circumstances can result in points being charged that are not for a broker's profit but are simply charged by the investor for the riskier nature of the morgage.



WHEN PAYING POINTS DOESN'T MAKE SENSE: Sometimes it doesn't make sense to buy down a rate or pay Origination Points. If you are moving in the near future it probably doesn't make sense to pay for a lower rate when you will not recoup the cost of the points in monthly savings by the time you move. Another instance when you should avoid paying points is when it is a charge borne of your Loan Officer's greed. While people should be compensated for their work, sometimes it is the case that a Loan Officer will try to pad their own pockets at your expense. Be sure to make yourself an informed borrower and talk to several people to make certain you are being a fair amount.

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