Are Mortgage Points Closing Costs?

During a close on a mortgage loan, you may hear the words ‘closing costs’ and ‘mortgage points.’ Since both are payments provided after the closing, you may wonder – are mortgage points closing costs? These two could be confused, but it’s time to learn more about them.

So, care mortgage points closing costs? Mortgage points are considered a part of closing costs. They are fees paid to the lender at the time of closing to lower the mortgage’s interest rate. These can include discount points, which are voluntarily purchased to reduce the interest rate, and origination points, which cover the lender’s processing costs.

Purchasing a home is an exciting milestone, but the process comes with many fees and costs. Two of the main costs associated with getting a mortgage are mortgage points and closing costs. But what exactly are mortgage points, and are they considered part of your closing costs? Let’s take a closer look.

What Are Mortgage Points?

Mortgage points, also known as discount points or origination points, are fees you pay to your lender to lower your mortgage’s interest rate. By paying points upfront, you reduce your interest rate over the life of the loan. 

Each mortgage point usually costs 1% of your total loan amount and lowers your interest rate by 0.25%. So if you purchase two points on a $200,000 loan, you would pay $4,000 upfront ($200,000 x 2% = $4,000). In return, your interest rate would decrease by 0.5%.

Mortgage points are a form of prepaid interest – you prepay a portion of the interest on the loan upfront in exchange for a lower rate. This can save you money over the long run if you keep the mortgage for several years.

Types of Mortgage Points

There are two main types of mortgage points:

1. Discount Points

Discount points are points you voluntarily choose to purchase from the lender to lower your interest rate. Since you opt into paying them, they are considered “discount points.”

2. Origination Points

Origination points are points the lender charges to cover their processing costs for underwriting your mortgage. Even if you don’t pay discount points, you’ll likely have to pay origination points.

How Do Mortgage Points Work?

Let’s look at an example. Say you qualify for a 30-year fixed mortgage with a mortgage rate of 5% and a loan amount of $200,000. 

• If you make no upfront payments, your monthly principal and interest payment would be around $1,074.
• If you pay $4,000 (2 points) upfront, your rate may decrease to 4.75%, making your monthly payment around $1,043. 
• Over 30 years, that 0.25% decrease saves you $10,692 in interest!

Paying points only makes sense if you keep the mortgage long enough for the savings to outweigh the upfront cost. Mortgage calculators can estimate your breakeven point.

Are Mortgage Points Considered as Closing Costs?

Yes, mortgage points are considered closing costs because you pay them at the time you close on your home. Closing is when you sign the final mortgage paperwork and become the official owner.

Closing costs refer to all fees charged to process, underwrite, and finalize your mortgage. In addition to points, closing costs include:

• Origination fees
• Appraisal fees 
• Credit report fees
• Title insurance fees
• Recording fees and more

So points are just one portion of your total closing costs. On a $200,000 loan, you can expect to pay between 2-5% of the total loan amount in closing costs. Points, origination fees, and title fees usually make up the bulk of these costs.

How Can Mortgage Points Affect Your Closing Costs?

If you pay discount points, it increases your closing costs. For instance, if your other closing costs equal $4,000, paying 2 discount points (at $4,000) makes your total closing costs $8,000.

However, points can also lower your interest rate and monthly payment. So while you pay more upfront, you save over the loan’s duration.

You can also receive lender credits to offset some closing costs. Often lenders will offer credits if you take a higher rate. This can cancel out the upfront costs of points.

Benefits and Drawbacks of Paying for Mortgage Points

Should you pay points or not? Here are some key benefits and drawbacks:

Benefits:

• Lower interest rate and monthly payments
• Pay off your loan faster
• Save money long-term if you keep the mortgage

Drawbacks:

• Large upfront fee that adds to closing costs
• Savings take time to realize (depends on breakeven period)
• Points don’t lower your principal balance

How to Decide If You Should Pay for Mortgage Points?

In general, points make the most sense for these borrowers:

• You plan to keep your mortgage long-term 
• Your credit is excellent (you qualify for the lowest rates)
• You want to pay off your loan faster
• You can afford the closing costs comfortably

Conversely, points may be unnecessary if:

• You have a shorter-term mortgage (under 10 years)
• You may move or refinance soon
• You have limited funds for closing costs
• Your credit needs improvement (higher rates make points less worthwhile)

Using mortgage calculators and speaking with loan officers can help determine if points fit your situation. Even small rate drops can yield substantial savings.

The best way to decide whether to get the points or not is to calculate the breakeven point. This is when all your accumulated monthly savings reach the upfront payment amount; this is calculated by dividing the cost of the points paid with the saved amount. 

From our example above, $2,000 divided by $29 equals 68 months. If you get a 30-year fixed-term loan, and 68 months is around five years, then your breakeven point will come sooner than expected. Before even considering points, consider if a mortgage is even worth it first; the numbers may seem seductive but they will put you in a long-term commitment.

What Other Fees Are Included in Closing Costs?

Closing costs span a wide range of itemized fees, including:

• Origination fees – Charges lenders collect to process your loan application. Often 1%+ of the loan amount.
• Appraisal fees – For the appraiser to estimate the home’s market value. Typically $400-$500.
• Credit report fees – Charges for the lender to access your credit reports. Around $25-$50 per report.
• Title insurance fees – Insures the lender against defects in the property title. Often $700-$2,000.
• Recording fees – Charges paid to the local government to record your home purchase publicly. Vary by location but often under $100. 
• Prepaids – Upfront payment of property taxes, homeowner’s insurance premiums, and potentially mortgage insurance. 

Home inspections, real estate agent commissions, and other home buyingfees are not closing costs, but also factor into your total purchase expenses.

For the buyer, some of the typical closing costs include:

• Closing fees – also known as escrow fees, which you pay to the party handling the closing, whether it’s a company or an attorney,
• Courier fee – this is a fee that could speed up the process of document delivery, which you won’t have to pay if your close is handled digitally,
• Escrow deposit – some lenders may ask for a tax and mortgage insurance deposit on their escrow account for the first two months,
• FHA mortgage insurance premium – FHA stands for Federal Housing Administration, and they sometimes require an upfront payment of a mortgage insurance premium. This payment could be rolled into your mortgage, but if you’re willing to roll it into the closing costs, it’s 1.75% of the base loan amount,
• Private mortgage insurance or PMI – your lender may ask you to pay for PMI if your down payment is lower than 20%,

Otherwise, other actions and fees are included in closing costs, which entail real estate inspection and management, from paying inspectors to check for lead-based paint and pests to paying surveyors and property appraisers to determine if the home is investment-worthy. All these things are closing costs that require a payment from you.

Understanding the Relationship Between Interest Rates and Mortgage Points

Mortgage points allow an inverse relationship between interest rates and closing costs.

• Lower interest rates = higher points/closing costs
• Higher interest rates = lower points/closing costs

When mortgage rates are low, paying points allows you to “buy down” the rate even further. When rates are high, points provide less value since even small drops in rate can be expensive.

Lenders also offer “no-point” or “no-closing cost” mortgages, balancing out points/fees with higher rates. You lose the interest savings but reduce your upfront payment. 

No-point options are worth considering if you have limited funds or don’t plan to stay long term.

Here’s a table representing how mortgage points reduce the interest rate and monthly payments, and we’ll consider the already mentioned example of a $200,000 mortgage loan.

Can You Negotiate Mortgage Points and Closing Costs?

Yes, it’s possible to negotiate both mortgage points and closing costs. Here are some tips:

• Shop around with multiple lenders to compare options.
• Be prepared to show competing loan estimates if lenders’ fees differ.
• Opt for lower points in exchange for a slightly higher rate.
• Ask about lender credits that offset your points/costs. 
• See if the seller can pay some of your closing costs.
• Avoid high origination fees by choosing lenders carefully.
• Apply with a trusted lender who offers personalized deals.

Having a strong credit score, minimal debt, and some flexibility on rates/costs also improves your negotiating power.

What Are the Tax Implications of Paying for Mortgage Points?

The IRS considers mortgage points as prepaid interest. So paying points can provide some tax deductions:

• Points paid to purchase a home are generally fully deductible in the first year of the loan. 
• Points for refinancing must be deducted gradually over the loan’s duration.
• The tax deduction only applies to loan origination points, not discount points.
• There are annual limits to the mortgage interest tax deduction, reducing deduction value for some borrowers.

Consulting a tax professional is wise to maximize deductions and understand how points fit into your broader tax picture.

Frequently Asked Questions(FAQ)

Who Pays Mortgage Points – Buyer Or Seller?

The buyer always pays for mortgage points. This directly influences a buyer’s mortgage loan and monthly payments, so the lender (or seller) can only be there to suggest buying points or talk you out of it.

It’s wiser to avoid paying any mortgage points if your interest rate is low. You could end up losing a lot of money since putting together closing costs, mortgage points, and a down payment will be a handful. Appeal to the lender to help you make a smart decision, or hire a real estate attorney to help with this decision.

Do Lenders Make Money On Points?

Yes, lenders make money on mortgage points, as well as other costs, like the origination fee, closing costs, mortgage-backed securities, loans servicing, and yield spread premiums. These are all services typically offered by mortgage lenders, so it’s wise to check what sort of fees your lender has.

Does the Seller Pay Any Closing Costs, and If Yes, Which?

Even sellers have some closing costs to pay, but they’re usually smaller in amount than what a buyer is responsible for. Here are some closing costs included for the lenders:

• Real estate commissions – real estate brokers typically charge around 5% – 6% of the home purchase price, which is then divided between the buyer’s and seller’s agents,
• Homeowner’s Association or HOA transfer fee – depends on the deal you make with the seller; the HOA is the association you must join when buying a home. This fee is for a direct ownership transfer that your seller could handle.

Can You Buy Mortgage Points After Closing?

In short – no. Mortgage points are part of your loan term, so by the time you’ve signed the documents, you’d have agreed to pay for the points or not. This is why it’s important to reconsider if mortgage points are right for you.

Read more about how to pay off your mortgage in 5 years here.

Buying Mortgage Points Is Beneficial, But You Have to Consider If It’s Worth It With All the Closing Costs

While the benefits of buying points are pretty apparent, from reducing interest to getting a lower monthly payment overall, it’s still a big risk to take. You have to consider closing costs and the processes that go into them. 

Buying points, a down payment, and paying for all the closing expenses requires a high budget, and if interest is low, points may not even be worth it. There are mortgages that are good for closing costs, too, so your duty is to get acquainted with their terms and conditions.

It would be best to decide what to do after learning the details of the investment. Some simply aren’t worth the risk, despite seeming like a steal. It’s likely they’re just that – steals, but only the ones that rob you of your hard-earned money.