Loan points
A point is one percent of the loan amount, paid at closing.
Two points on a $200,000 loan is $4,000. The arithmetic is simple; what the points buy is where the distinction matters.
Two kinds, and only one buys anything#
Discount points purchase a lower interest rate for the life of the loan. Real consideration for a real benefit.
Origination points are the lender's compensation for making the loan. They buy nothing except the loan itself.
Both appear as "points". The Loan Estimate separates them, which is one of several reasons to read it rather than compare rates.
The break-even calculation#
The only question that matters on discount points.
Divide the cost of the points by the monthly payment saving. The result is the number of months to break even.
Pay $4,000 to save $60 a month, and the break-even is 67 months — nearly six years. Sell or refinance before then and the $4,000 is simply gone.
Most borrowers do not hold a mortgage for six years. Points are frequently purchased by people who will not be there to collect on them.
Where the calculation changes#
A long, certain hold. Someone confident of staying twenty years in a fixed-rate loan is a genuine candidate.
High rates expected to fall. Buying down a rate you intend to refinance away from is paying for something you plan to discard.
Seller-paid points. Where a seller credit funds them, the borrower's break-even arithmetic changes entirely, because the cost was not theirs.
Points on hard money and bridge lending#
A different world, and the numbers are much larger.
Two points on a $200,000 hard money loan is $4,000 — paid on a loan that may only run nine months. Annualised, that alone is over 2.5 percent on top of the stated interest rate.
Which is why the effective cost of short-term lending has to be calculated as points plus interest over the actual holding period, not read off the rate. A $200,000 loan at 2 points and 11 percent for nine months costs $20,500 — about 13.7 percent annualised.
Our hard money calculator does that arithmetic, because comparing two lenders on rate alone reliably picks the wrong one.
What to ask#
On any loan quote: how many points, are they discount or origination, and what is the rate with and without them.
Two lenders quoting the same rate with different point structures are quoting materially different loans.