Points

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Points

Points are loan fees paid by the borrower. One (1) point is equivalent to 1.00% of the loan amount. So a loan for $5,000,000 with a mortgage brokerage fee that totals 1.5 points is equal to $75,000. A mortgage broker fee of 1 point would be equal to $50,000.

In residential loans, points can also come in the form of pre-paid interest known as “discount points”. Again, each discount point cost 1.00% of the total loan amount. Each point paid by the borrower lower’s their interest rate by one-eighth (1/8th) of the borrower’s interest rate. By charging a borrower points, a lender effectively increases the yield on the loan above the amount of the stated interest rate. Borrowers can offer to pay a lender points as a method to reduce the interest rate on the loan, thus obtaining a lower monthly payment in exchange for this up-front payment.

Both lenders and borrowers gain benefits from discount points. Borrowers gain the benefit of lowered interest payments down the road, but the benefit applies only if the borrower plans on holding onto the mortgage long enough to save money from the decreased interest payments. Borrowers also gain the advantage of tax discounts in the year the mortgage was originated. Lenders benefit by receiving cash upfront instead of waiting for money in the form of interest payments over time, which enhances the lenders liquidity situation.

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