Mortgage Points, Explained

If you're learning about mortgages, you'll hear the term "points" a lot. A "point" is 1% of the value of the mortgage loan. So, if your mortgage is $150,000, one point is $1,500. When someone takes out a mortgage, "points" are often involved. Typically, these are "origination" and "discount" points.

Origination points are charged for originating, or launching, your mortgage. You pay these points up front when you begin the mortgage. Discount points serve to lower your interest rate (and thus your payments). The idea here is that if you cough up a little extra at the beginning, you can pay less over time.

Although it may appear that your interest rate is the one officially listed on your mortgage, it's not necessarily a reflection of the actual rate you'll have paid over the life of the loan. You should incorporate the effect of points into the rate and your total loan. For example, if your mortgage is for $150,000 and you pay a total of two points, then you're really paying $153,000 -- plus interest.

If you're interested in home-buying and home-owning issues, visit our Home Center, which features lots of money-saving tips and even some special mortgage rates. In addition, drop by our Buying or Selling a Home discussion board.

You might also want to check out these articles on topic:

And if you're in the market for a mortgage, another way to inform yourself about options is to spend some time at the websites of lenders. Here are some biggies:

  • Capital One
  • WashingtonMutual
  • Wachovia
  • Countrywide Financial
  • National City
  • Bank of New York
  • Wells Fargo

WashingtonMutual is a Motley Fool Income Investor pick. Take the newsletter for a 30-day free trial.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.

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