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# How are mortgage points calculated?

Did you know that mortgage points can lower your interest rate? It's true!

Here's how mortgage points work. The lender needs to earn a certain amount of interest on a loan. The lender could offer you a 5% interest rate on the loan amount of \$100,000 for 30 years and you would pay \$93,256 in interest over the life of the loan. Ouch!

But if you're willing (and able) to prepay some of the interest at settlement, the lender can offer you a lower interest rate since you are paying some of the interest upfront. Here's what I'm talking about. Below, is a typical interest rate chart that displays the interest rates for a 30 year mortgage.

## How much are points on a mortgage?

A mortgage point is equal to 1% of the loan amount. The math is simple. Multiply the loan amount by the mortgage points and hit the percentage key on your calculator. For example, \$100,000 X 1% = \$1,000.

Loan Amount100,000
Interest RatePoints30 YearsCost of Points
5.00%0.000536.82\$0
4.75%1.000521.65\$1,000
4.50%2.000506.69\$2,000
4.25%3.000491.94\$3,000

## Why pay points on a mortgage?

The reason people pay (or buy) points is because points lower the total amount of interest paid to the lender over the term of the mortgage.

A. Mortgage points can be beneficial because they reduce the total amount of interest paid to the lender, but, if you're going to stay in the house for a short time period, then points are bad.

Q. Are points and origination fees the same?
A. It depends on the lender. Some lenders understand that home buyers and homeowners have an aversion toward mortgage points, so those lenders will call the discount point(s) an origination fee rather than call it a discount point. However, other lenders will group all of their costs under an origination fee.

Q. Can I get a mortgage on my house if I own it outright?
A. Provided you (and the house) meet the standard loan qualifications, there is no reason why you can't get a loan (mortgage) on the house.

Q. Do points go toward principal?
A. Points are prepaid interest. Points reduce the interest rate on the loan, not the principal.

Q. How can I pay off my mortgage in 5 years?
A. Use our extra payment calculator to estimate the over payment each month

Q. Is there a limit on mortgage points?
A. There is a limit on the number of points. The total number of points will depend on the lender and type of loan (i.e. conventional versus FHA). There is a diminishing return with mortgage points. Typically, as the points exceed 3 points, the value decreases.

Q. What are negative mortgage points?
A. Just as paying points reduce the interest rate, increasing the interest rate decreases the number of points. In short, the mortgage points go negative. For example:
5% + 0 point
5.25% + -1%

Lenders often use the negative points to buy down the closing costs. Based on the previous example, if the loan amount is \$100,000 X 1% = \$1,000. The lender uses that \$1,000 toward the borrower's closing costs. Keep in mind that the interest rate was increased to obtain the lender subsidy.