REAL TipS: BUYING

Understanding the lingo – points

Points is a common word you’ll hear when you’re in the process of buying a home or acquiring financing. But what does it mean? A little confusion is understandable because the word can have different meanings.

Origination points or origination fees are a part of the cost of acquiring a mortgage—they’re the fee you pay to your lender or loan officer as compensation for processing and approving the loan. These are usually a percentage of the total loan amount, but are expressed as points—one point is equal to one percent of the loan amount.

Discount, or buy-down, points are up-front fees paid to obtain a better interest rate on a loan. Again, one point equals one percent of the loan amount. A lower interest rate results in a lower monthly payment. Each point you pay lowers your rate by specified amount, usually from 0.25% to 0.50%.

Buy-down points are basically pre-paid interest, so unless you’re refinancing, they're usually tax-deductible. Be sure to contact your tax attorney or CPA if you have questions about deductions of this nature.

Before you consider buying down your interest rate, it’s important to consider how long you plan to be in the loan. If you decide to refinance or sell the home before your “break-even month”, the money you spent on buying down that interest rate is gone.

It’s also to your advantage to evaluate current market trends against historical figures. It makes sense to pay points when rates are low if you’re planning to be in the house for an extended period of time. Since it’s unlikely that rates will drop further, there will be no need to refinance.

Conversely, if rates are high, there is a strong possibility they will come down. The chances of refinancing in the future are good, and you may not be in the loan long enough to recuperate the cost of the points.

A loan officer should be able to explain your options in plain English … and your Texas REALTOR® can help you assess your alternatives, as well.

Texas Association of Realtors®