What Are Mortgage Points? | St. Johns Bank

Mortgage points have confounded generations of Americans. In sports and card games, points are good, so are they also good on mortgages?

If you’ve heard points can lower the interest rate you pay on your mortgage, maybe they seem like a no-brainer, but is there a potential downside?

St. Johns Bank is here to help you understand your finances so you can manage them wisely and confidently. Part of that is helping you understand concepts like mortgage points, so let’s get into it.

What Are Points on a Mortgage?

Points are additional fees you pay at closing, with each point costing 1% of your total loan amount. You can also get fractional points, typically in quarter-percent increments. Each point or fraction of a point reduces your interest rate for the life of the loan by a specified percentage.

Points allow lending institutions to get some of the money they would typically collect over the life of the loan at origination. As noted, they also cut your monthly payments and what you pay over the term by lowering the interest rate on the loan.

Here’s a hypothetical example: Say you decide to secure a mortgage for $250,000 and the interest rate on your 30-year fixed loan is 4.75%. (Important: All numbers presented here are exclusively for demonstrative purposes. You should talk with a St. Johns Bank mortgage expert to get current and exact rates and figures.)

That could equal a monthly payment of $1,304.12 and lifetime interest payments of $219,482.60. If one point gets you a 0.25% decrease in your interest rate, purchasing two points upfront could cut your monthly payments to $1,229.85 per month and your overall interest payment to $192,745.90.

As you can see, that half-point reduction in interest rate can net a monthly payment reduction of more than $74, but the real reward comes in the lifetime savings, which is much larger than that amount times the 432 months of the loan term. That’s because loan interest is amortized.

So, the lifetime interest payment savings in the example add up to $26,736.70. Taking into account the $5,000 paid for the points (1% of the loan x 2 points = $5,000), the total savings is $21,736.70. That’s enough to build a healthy nest egg, buy an economy car or finance improvements to create a dream home.

Every financial situation is different and rates change constantly. For up-to-date numbers and more help understanding mortgages, talk to a St. Johns Bank mortgage advisor today!