What Are Negative Points on a Mortgage?

When securing a mortgage, borrowers encounter various financial terms that influence the loan’s structure and cost. Understanding these terms is important for making informed decisions. While many are familiar with paying fees to reduce their interest rate, another option exists where the lender provides a credit. This approach, often called “negative points,” represents a financial tool that can significantly alter a borrower’s upfront and long-term expenses.

What Mortgage Points Are

In the context of a mortgage, a “point” is a fee paid to the lender, 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 generally paid at the loan closing.

The most commonly known type is “discount points,” where a borrower pays an upfront fee to receive a lower interest rate on their loan. While discount points increase the immediate cash needed at closing, they aim to reduce monthly payments and the total interest paid over the life of the loan. However, points can also operate in the opposite direction, providing a credit to the borrower.

What Are Negative Points

Negative points, also known as lender credits, are funds provided by the mortgage lender to the borrower. These credits are designed to offset some or all of the borrower’s closing costs. Instead of the borrower paying additional fees upfront, the lender contributes a portion of these costs.

In exchange for this financial assistance, the borrower agrees to a higher interest rate on their mortgage. This trade-off involves reducing immediate expenses for an increased long-term interest obligation. On official loan documents like the Loan Estimate or Closing Disclosure, these lender credits typically appear as a negative number or a “negative point” line item.

How Negative Points Impact Your Mortgage

The lender credit received through negative points is applied to reduce various fees and charges associated with closing a mortgage. These closing costs often include expenses such as loan origination fees, appraisal fees, title insurance premiums, and other administrative charges. By accepting negative points, the cash required from the borrower at closing can be significantly lowered.

The amount of lender credit has a direct relationship with the mortgage’s interest rate. A larger credit results in a higher interest rate on the loan. This higher rate leads to increased monthly mortgage payments and a greater total amount of interest paid over the entire loan term. For instance, a small increase in the interest rate, perhaps 0.125% to 0.25%, can translate into thousands of dollars in additional interest over a 30-year mortgage.

Considerations for Using Negative Points

The decision to use negative points depends on a borrower’s financial situation and plans for the property. Negative points can be an option for those with limited cash for closing costs, making homeownership more accessible by reducing out-of-pocket expenses at closing.

However, the higher interest rate associated with negative points means increased monthly payments and a greater total cost over the loan’s lifetime. For borrowers who intend to stay in their home for an extended period, the accumulated additional interest paid might outweigh the initial savings on closing costs. Conversely, if a borrower anticipates selling the home or refinancing the mortgage within a few years, the higher interest rate may be less of a concern, as they would not pay the elevated rate for the full term. Evaluating cash liquidity and long-term housing plans is important when considering negative points.