Rate/Point Options

The pricing structure for a mortgage. A point is equal to one percent of the mortgage amount. In general, the lower the mortgage rate, the higher the cost (the more points paid). It’s up to the borrower to choose the option that will save him or her the most money.

Rate and point options define the pricing structure for a mortgage. A point is equal to one percent of the mortgage amount. In general, the lower the mortgage rate, the higher the cost (the more points paid). It’s up to the borrower to choose the option that will save him or her the most money.

Here is an example of rate and point options for a $200,000 mortgage for a home purchase with 20 percent down.

250 percent: zero points, zero fees
125 percent: zero points, $1,000 fees
000 percent: one point, $1,000 fees
875 percent: two points, $1,000 fees

Ten Year Loan Example

In the results below, in ten years, the loan with the 4.125 percent rate has the lowest cost.

Table showing interest rate, fees, points and payment for a loan with various percentage rates

Thirty Year Loan Example

If you keep the loan for 30 years, though, the most expensive loan has the lowest cost.

Table showing interest rate, fees, points, and payment for a 30-year loan

Five Year Loan Example

Over a 5-year period, the loan with the highest rate has the lowest costs. In most cases, if the borrower does not plan to keep a home for many years it’s cheaper to pay less upfront.

Table showing interest rate, fees, points, and payment for a 5-year loan

Interest rates and points explained

When applying for a loan, the lender typically provides you with several different scenarios for your mortgage product. These are rate/point options.

Typically, a lender does not offer you just one interest rate. Almost always, the lender will offer you several different rate options. This is made possible through adjusting the points. The interest rate generally decreases when you pay points. This is because you are actually paying interest in advance. One point is equal to one percent of the loan amount and brings the interest rate down a quarter point. For example, on a $100,000 loan, one point would equal $1,000 and bring down the interest rate from 7 percent to 6.75 percent. The more points that a buyer pays up front, the lower the interest rate will be.

When deciding whether or not to pay points, consider how long you plan to live in the house. If you intend to be in the house for less than five years, a general rule of thumb is to avoid paying points. Chances are, that amount of time won’t be long enough for you to recoup the initial cost.