Buying Points On A Loan

Points are a one time fee that is customarily needed to acquire a loan. One point is equal to 1% of the new loan amount. Points can be paid by either the buyer or the seller, and can also be split between these two parties. Either the buyer or the seller can pay discount points, if they are requested.

Decide whether to pay discount points. When offered, discount points will reduce the interest rate on the loan by the amount paid. So, for example, if you are obtaining a $200,000 mortgage at a 6 percent rate, you may be able to pay one point ($2,000, or 1 percent) to reduce your interest rate to 5 percent.

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You can buy multiple points, fractions of a point and even negative points (more on that later). How many you can buy depends on the lender and your loan. Some lenders may let you buy 3-4 points; others may limit you to only one or two.

The cost of each point is equal to one percent of the loan amount. For instance, for a $100,000 loan, one discount point equals $1,000. Paying for points lowers your interest rate, because the lender receives the income in a lump sum at closing rather than collecting the interest as you make payments on your loan.

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For example, say you were taking out a $250,000 loan and you had a choice between buying 0 points with an interest rate of 4.5% or buying one point and reducing your interest rate to 4.25%.

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