When you’re shopping for a mortgage, you will have the option to purchase mortgage points or to get a lender credit. Both can affect the amount you will pay at closing and the amount you will pay each month, but in different ways.
How Mortgage Points Work
Mortgage points, which are sometimes called discount points, can reduce your interest rate. The fee for each point is 1% of the loan amount. You can purchase one or more points, or a fraction of a point. You will pay a fee at closing and will have a lower interest rate and lower monthly payment for as long as you have the mortgage.
Specifics vary by lender. Each lender uses its own criteria to set interest rates and determines how much purchasing a point will affect the interest rate.
If you get the same number of discount points from two different lenders, they might reduce your interest rates by different amounts. If you get a quote for a mortgage with points from one lender, the interest rate might still be higher than another lender’s interest rate without points.
How Lender Credits Work
The way that lender credits work is the opposite of how mortgage points work. If you get a lender credit, the lender will reduce your closing costs, and you will have a higher interest rate. That means that you’ll pay less up front, but you will pay more each month. When you review the Loan Estimate or Closing Disclosure form, you may see lender credits listed as negative points.
Again, the specifics will depend on the lender. If you get quotes including lender credits from two financial institutions, they might reduce your closing costs by different amounts and/or charge you different interest rates.
Should You Get Mortgage Points or a Lender Credit?
The answer to this question depends on how long you plan to stay in the house. Mortgage points can lower your interest rate and save you money, provided that you stay in the house long enough to recoup the extra amount you pay at closing and then continue to save money each month after that. If you plan to move relatively soon, paying extra for points might not make sense.
A lender credit can save you money at closing. That might be a good deal if you’re strapped for cash right now, but you’ll be able to afford to pay a bit more each month.
Remember that a quote from one lender with mortgage points or lender credits may or may not be better than a deal from a different lender. Shop around and compare rates and terms from several lenders.
