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How Mortgage "Points" Affect Your Mortgage Loan And Borrowing Power

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When you start searching for mortgage lenders, there may be some lenders that expect you to pay "origination points" or "discount points." These points both serve a purpose in the mortgage universe, and it is up to you to decide if you want to pay for "points." Here is how these two different mortgage points systems affect your loan and your borrowing power.

Origination Points

These "points" are prepaid to the servicer of your mortgage. It is akin to giving the servicer a big fat tip for handling your mortgage. If you do not like the sound of that, you have more power than you know in this particular area. You can not only bargain your way down to the most minimal of points allowed; you can find a mortgage lender that requires no points at all. Most people, for obvious reasons, opt for the latter, but if you find that the fine print in your mortgage offers is not all you are looking for, you may want to try a "bargaining war" between the best mortgage lender with no points and the lender with the least points. As they vie for your business (and most lenders will), you should end up with the points lender with almost no points to pay.

Discount Points

If you are having a really difficult time trying to get a decent rate on your mortgage, some lenders offer discount points. People who cannot get a mortgage may also try this approach, as it helps sway the lender into creating a loan offer where none were possible on your credit alone. Essentially, you pay "x" amount of dollars per point to decrease the interest rate on your mortgage.

So, for example, say that you are offered an EIGHT percent rate on a mortgage because your credit is really poor. The lender offers discount points that are typically equal to one percent of the mortgage you seek. On a home priced at $150,000, each point is worth $1,500. If you want to cut the interest rate on the mortgage in half, you would pay the lender $6,000 to get a mortgage with a four percent interest rate. Conversely, for people who have excellent credit and can get a mortgage with a three-and-one-half percent interest rate, you can pay for three discount points, giving you a mortgage of one-half percent for the duration of the loan or until the ARM rate readjusts.