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What are Points?
Your monthly mortgage payments are basically based on the principal, the interest rate, the loan term and the market conditions. However, one way to get a lower interest rate is to pay "points" as part of the closing costs. There are two kinds of points:
  • origination points: lender fees charged for initiating the loan
  • discount points: points paid to reduce the overall interest rate
Each point equals one percent of the total loan amount.

For example, say you have a $500,000 loan with an offer to pay a six-percent interest rate with one origination point and one discount point. This means, you would pay $10,000 in closing costs to get a loan with these terms.

While this might seem unfair, the concept can also work to your benefit. The idea is that the lender can make money now rather than in the long run (by charging you a higher interest rate). This is more beneficial for borrowers that intend to stay in their home for longer periods (at least five years, for example). Or if you believe there will be a period of inflation before the mortgage loan is fully paid off.

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