Legal Definitions - mortgage point

A mortgage point is a fee paid to a lender at the time a home loan is finalized, known as closing. Each point is equal to one percent (1%) of the total loan amount. Borrowers typically pay points to either reduce the interest rate on their mortgage (these are often called "discount points") or to cover certain lender fees associated with processing the loan (sometimes called "origination points"). Paying points upfront can lower monthly payments over the life of the loan, but it increases the initial cost of obtaining the mortgage.

Here are some examples illustrating how mortgage points work:

• Example 1: Reducing the Interest Rate on a Home Purchase

  A couple is buying a new home and needs a $350,000 mortgage. The lender offers them an interest rate of 6.8% with no points, or 6.3% if they pay two mortgage points. If they choose the lower interest rate, they would pay 2% of $350,000, which is $7,000, at closing. This upfront payment is a trade-off for a lower monthly mortgage payment and reduced interest costs over the entire term of the loan.

• Example 2: Covering Lender Origination Fees

  A first-time homebuyer secures a $280,000 mortgage. The lender charges one mortgage point as an "origination fee" to cover the administrative costs of processing and underwriting the loan. In this scenario, the homebuyer must pay $2,800 (1% of $280,000) at closing. This fee is a direct payment to the lender for their services in setting up the loan, rather than specifically reducing the interest rate.

• Example 3: Paying Points During a Refinance

  A homeowner decides to refinance their existing $220,000 mortgage to take advantage of lower market interest rates. Their new lender offers a significantly better interest rate if they pay 1.5 mortgage points. To secure this more favorable rate, the homeowner pays $3,300 (1.5% of $220,000) at closing. This upfront cost is an investment that the homeowner expects to recoup through the long-term savings from reduced monthly payments on their refinanced loan.