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"Points" Explained

By Motley Fool Staff – Updated Feb 14, 2017 at 3:34PM

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Learn what points are before you pay them.

If you're shopping for a new home and mortgage, you're going to hear a lot about points. A "point" is 1% of the value of the mortgage loan. So, if your mortgage is $150,000, one point is $1,500. 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.

You can learn more about home buying in our Home Center -- we've even got some good deals on mortgage rates for you there and info on refinancing. In addition, drop by our Buying or Selling a Home discussion board.

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