How Are Mortgage Rate Points Calculated?
Mortgage points offer borrowers the opportunity to pay extra costs at the start of the mortgage to reduce the interest rate on the mortgage. These costs add to the amount you have to pay when you take out the mortgage.
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Cost
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Each mortgage point costs 1 percent of the amount you borrow. For example, on a $262,000 mortgage, each point would cost $2,620.
Interest Rate
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The interest rate will drop by about 0.25 percentage points, depending on the offered rate and market conditions, according to the Mortgage Professor. Higher interest rates will drop more with each point you pay.
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Benefits
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Paying points helps people who expect to keep their mortgage for a long period of time. If you refinance, pay off the loan early or move, the points paid do not carry over to your new mortgage.
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