How Much Is 25 Points on a Mortgage? A Cost Explanation

Mortgage points are an upfront cost paid to the lender at closing when obtaining a home loan. These fees can influence the loan’s terms, particularly the interest rate.

What Are Mortgage Points

A “point” in the context of a mortgage is a fee equal to one percent of the total loan amount. For example, on a $300,000 mortgage, one point would cost $3,000. These points are distinct from the loan’s interest rate, which is the percentage charged on the borrowed principal over time. They are also separate from other closing costs, such as fees for appraisals, title insurance, and legal work. Mortgage points are a form of prepaid interest that borrowers can choose to pay to potentially reduce their interest rate over the life of the loan. The decision to pay points can affect the overall cost of the mortgage and the monthly payment.

Calculating the Cost of Points

The cost of mortgage points is calculated by multiplying the loan amount by the number of points, expressed as a percentage. For instance, a $200,000 loan with 1 point would cost $2,000 ($200,000 x 0.01). The query of “25 points on a mortgage” would mean 25% of the loan amount. For a $200,000 loan, 25 points would be an upfront cost of $50,000 ($200,000 x 0.25).

This number of points is extraordinarily high and highly unusual in real-world mortgage transactions. Lenders typically cap the number of points a borrower can purchase, with common maximums often around four points. For more realistic examples, a $350,000 mortgage with 0.5 points would cost $1,750 ($350,000 x 0.005). Paying 1 point on this loan would cost $3,500 ($350,000 x 0.01), and 2 points would cost $7,000 ($350,000 x 0.02).

Common Types of Mortgage Points

Discount Points

Discount points are paid to reduce the interest rate on the mortgage. By paying these points, a borrower prepays some interest to secure a lower interest rate for the loan’s duration. For each discount point purchased, the loan’s interest rate is typically reduced by approximately 0.25%, though the exact reduction can vary by lender and market conditions. This reduction can lead to lower monthly payments and significant savings over the life of the loan.

Origination Points

Origination points are fees charged by the lender for processing the loan application. These points compensate the lender for their services in creating, processing, and underwriting the loan. Unlike discount points, origination points do not directly reduce the interest rate of the mortgage. Not all lenders charge origination points, and some may offer loans with no or reduced origination fees, often in exchange for a slightly higher interest rate.

Evaluating Paying Points

Deciding whether to pay mortgage points involves a financial assessment, particularly for discount points. A key consideration is the “break-even point.” This is the time it takes for monthly savings from a lower interest rate to offset the initial cost of the points. It can be estimated by dividing the total cost of the points by the monthly savings. For example, if points cost $3,000 and save $50 per month, the break-even point would be 60 months, or five years.

The borrower’s expected loan term is a significant factor. Paying discount points is generally more advantageous for those who plan to keep their home and mortgage for a longer period, ideally beyond the break-even point. If a borrower anticipates moving or refinancing in a few years, they might not recoup the upfront investment. The Internal Revenue Service (IRS) allows for the deduction of discount points in the year paid for a primary residence if certain conditions are met, such as the loan being used to buy or build the main home.

Current interest rates also play a role; in a higher interest rate environment, the savings from buying down the rate might be more substantial. A borrower’s financial situation, including available cash for closing costs, also influences this decision. If funds are limited, using available cash for a larger down payment might be more beneficial than paying points.