What Are Points on Home Equity Loans?

Home equity loans are loans that you take out against the value of your home that can be used for any purpose. When you take out a home equity loan, you have the option to pay points on the loan.

Function

Points are a form of prepaid interest. Each point you pay reduces the interest rate on your loan by about a quarter of a percentage point.

Cost

Each point costs 1 percent of the amount you are borrowing. For example, a home equity loan of $100,000 would charge $1,000 per point.

Considerations

You should consider how long you plan to keep the home equity loan and how much the points will save you on your home equity loan monthly payment, which your lender will be able to tell you.

Considerations

You can find out how long it takes for the points to pay for themselves by dividing the cost of the points by the amount the points will save you per month. For example, if the points cost you $1,250 and will save you $25 per month, it will take 50 months of payments before you break even.

Time Frame

Points must be paid at the time the loan is issued. Even if paying them will save you money in the long run, you cannot take advantage of them unless you can pay for them upfront.

References

• Federal Reserve: What is a Home Equity Line of Credit?
• Texas Office of Consumer Credit Commissioner: Home Equity Brochure