Moneyzine
Contents
/Personal Finance/Mortgage Points

Mortgage Points

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 25th, 2023
Advertiser Disclosure

Definition

The term mortgage points is used to describe the upfront fee lenders place on a mortgage to reduce the interest rate charged the borrower. The payment of points results in the prepayment of interest charges, which lowers the overall risk of the loan.

Calculation

Money Due at Closing = (Points / 100) x Dollar Value of Mortgage

Explanation

Mortgage points are paid at the time of closing, and are usually stated as a percentage of the loan amount. Points represent a prepayment on a loan. They are used to reduce the loan's risk, and result in a lower rate of interest charged to the borrower. Since mortgage points are a prepayment of interest on a loan, they are a deductible expense on federal income tax returns.

Points are included in the calculation of the annual interest rate, or APR, which can be used to compare loans. The relationship between APR, points, and interest can be seen in the following example for a 30 year fixed rate mortgage:

Interest RatePointsAPR
5.875%0.2505.898%
5.750%0.8755.295%
5.500%1.8755.672%

The borrower should keep in mind that points are used to reduce interest payments over the entire lifetime, or term, of the loan. If the homeowner knows they are moving or refinancing a loan in the near term, the benefit of the points is lost, as well as the money paid for the points.

Example

Ann is buying a home and after considering the money she has available to pay her closing costs; she decides to secure a mortgage that requires the payment of 1.5 points. Ann is going to purchase a home for $400,000, and is able to make a down payment of $100,000; therefore, Ann's mortgage will be $300,000.

The money needed at the home's closing to pay the mortgage points would be:

= (1.5 / 100) x $300,000 = 0.015 x $300,000, or $4,500

Related Terms

Related Content

  • What Can Help You Meet Your Budget While Shopping for Important Items?
    Budgeting while ensuring you don't compromise on quality can seem daunting. Whether filling your pantry, updating your wardrobe, or keeping up with the latest tech, smart shopping strategies are crucial for keeping your finances in check.
    April 2nd, 2024
  • How to Make a Million Dollars in 10 Years
    Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
    November 18th, 2024
  • How to Apply Maslow’s Hierarchy to Your Money This Year
    You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
    November 18th, 2024
  • How to Tackle Multiple Savings Goals
    When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
    March 22nd, 2024
  • The Countdown to Early Retirement: 10 Expenses to Eliminate
    Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
    March 22nd, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.