These terms can sometimes be used to mean other things. Depending on your lender, “points” may refer to any upfront fee that is calculated as a percentage of your loan amount. “Lender credits” may refer to things that are unrelated to the interest rate you pay.
This article refers specifically to discount points and lender credits that are connected to your interest rate. If you are considering using either of these, always consult your licensed mortgage professional to be sure you understand the impact on your interest rate.
Points
Mortgage discount points are fees paid to the lender in exchange for a reduced interest rate on your home loan. When you purchase points, you pay more upfront, but you receive a lower interest rate. Getting a lower interest rate means you'll get lower monthly payments and pay less over the life of the loan. This is one of the strategies lenders refer to as “buying down” the rate. There are other buydown options, such as a 3-2-1 buydown and a 2-1 buydown, but here we will focus only on discount points.Points are calculated in relation to the loan amount. Each point you buy costs 1% of the loan amount. For example, one point on a $300,000 mortgage would cost $3,000. Points do not have to be purchased in round numbers – you can pay for 1.375 points ($4,125), 0.5 points ($1,500), etc. Points are paid at closing, so they will increase your closing costs.
The exact amount your interest rate is reduced per point you purchase depends on the lender, the type of loan, and the mortgage market conditions.
Who should use discount points? The tradeoff you make when buying discount points is that you will have to pay more at closing to get a lower rate and monthly payment over time. Generally, you should only purchase discount points if you plan to stay in the home long term because it can take several years to recoup the cost. If you have a lot of cash but not a lot of monthly income, discount points can be quite useful. For example, you may pay discount points to lower your interest rate and help you qualify for a house if you inherited a large amount of money but only qualified for a limited purchase amount. Or if you're retired and wish to downsize your home and monthly payments, purchasing points might be beneficial.
Don’t confuse discount points with mortgage origination points. These are fees paid to lenders to originate, review, and process the loan. These typically cost around 1% of the total mortgage. For example, if a lender charges 1 origination points on a $300,000 mortgage, the borrower must pay $3,000. These points are paid at closing and will be listed in your loan estimate document you get when you apply, as well as the closing disclosure you get before you close. Origination points differ from discount points because they do not directly reduce the interest rate of the loan.
Lender credits
Lender credits work in the opposite direction of discount points. In exchange for paying a higher interest rate, the lender gives you money to offset your closing costs. You will pay less upfront but more over time with the higher interest rate.Lender credits are calculated similarly to discount points and might appear as negative points on your Loan Estimate and Closing Disclosure. Using the same purchase scenario as above, on a $300,000 mortgage, a lender credit of $3,000 is equal to one negative point. The $3,000 lender credit offsets your closing costs and lowers the amount you must pay at closing.
The exact increase in your interest rate per negative point depends on the lender, the type of loan, and the mortgage market.
Who should use lender credits? The tradeoff you make when using lender credits is that you will have a higher interest rate and monthly mortgage payment, so that you don’t have to pay as much at closing. This could be good if you don’t have a lot of cash for closing but can afford a larger monthly payment. It could also be helpful in cases where the home needs repairs or renovations. Instead of depleting your cash reserves at closing, you can use that money towards the upgrades you need.
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