What Are Loan Points?

The interest rate on a mortgage loan can make or break the profitability and affordability of a home. On such large loans, a difference of even half a percentage point can translate to thousands of dollars more paid out in interest by the time that loan matures. There are a number of things you can do to help ensure the best possible interest rate. Namely, do everything you can to keep a high credit score, shop around for the best interest rates for the property you want, and consider the option of purchasing points on your mortgage loan.

Nearly everyone who has ever considered purchasing a home has heard about points, though many still aren’t sure what those are. Simply put, points are purchased to lower your interest rate on a new loan. Not all lenders give the option of purchasing points, but they have the potential to save thousands of dollars for a homeowner throughout the life of a loan.

Most lenders give you the option of purchasing up to three points, each one reducing your interest rate by a set percentage. For example, if you are offered a loan at 8.5% and each point will lower that by .25%, you can reduce that interest rate to as little as 7.75% if you take the option of purchasing all possible points.

The price of each point will vary per lender, as will the value of each in respect to the percentage decrease. In general, points will give up to a .25% discount apiece, though it can be lower. Many lenders use a percentage of the overall value of the loan as the determining factor in the price of points, while others have a set price of $1,000, $2,000 or more per point.

While the cost may seem a bit high, points can be well worth it in the long run. Over the course of a 15-year loan, the purchase of points can save several thousand dollars in interest. If you’re planning on staying in a home indefinitely, preferably ten years or more, points are most likely worth looking into as they can decrease your payment and significantly decrease the overall expense of purchasing a new home.

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