In the world of lending, one point is 1% of a loan amount. So, one point on a $150,000 loan would be $1,500. Points, in general, may be referred to as either discount points or loan origination points.
You may have heard the term points used in a couple of different ways. One of them is probably in mortgage loan advertisements, referring specifically to how many points a lender is charging for a given rate on a loan.
For example, Lender A is offering a 5.0% interest rate on a 30-year, fixed-rate mortgage and is charging no points. Lender B is offering the same loan at a lower rate of 4.5% but is charging one point, or $1,500. Why is this?
The answer is that lenders, like any other business, need to make money to be able to stay in business. Lenders make money on loans in one of two ways.
One way is via the interest rate they charge. The higher the rate, the more money they make when they sell the loan after it closes. The other way they make money is to charge fees.
However, to remain competitive with each other in the marketplace, lenders need to offer you, the consumer, the best possible terms.
As you consider your loan options, your long-term ownership plan as well as your willingness to pay points will help determine your best strategy.
A consultation with your mortgage professional can help determine which option is best for you.