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 not closing costs. The main difference between mortgage points and closing costs is that mortgage points are paid by the borrower to lower their interest rate, while closing costs are paid by the borrower to cover the expenses of the home loan transaction.

All this information could give you a headache and make you question how much you know about finance. It’s normal to feel overwhelmed by it all, but the best way to learn the difference between mortgage points and closing costs is through research, which we can help you with.

No, Points On A Mortgage Are Not Considered Closing Costs, But What Is the Difference?

Mortgage points are discount points or fees that the borrower pays to a lender to reduce the interest rates on loans. Consequently, this would also reduce the monthly payments over the years. Buying mortgage points is also known as “buying down the rate,” and buying points effectively means paying interest in advance. Read more about mortgage points here. 

Typically, one point is around 1% of the mortgage total, meaning that $2,000 would be one point of a $200,000 loan, and alike. You can buy more than one point or even a fraction of it as a borrower. Say we include the mentioned $200,000 loan. In that case, half a point of that would be $1,000. 

Each point reduces interest on a mortgage by about 0.25%, but this could be different for each lender. Similarly, if you buy half a point, the percentage halves as well, reducing the interest rate by 0.125% instead of a full 0.25%.

Closing costs are the costs paid after the contract with the lender is signed, and they are fees for every inspection and service provided by the lender and other parties. They amount to 3% to 6% of the home purchase price. Our $200,000 loan would then have closing costs between $6,000 and $12,000.

Here is an example of Rocket Mortgage closing costs.

Closing costs are determined by a few factors: loan type, the lender, and the state rules. Researching them well is crucial for making the best decision possible, so start by first looking at the state rules and regulations and then find a suitable lender.

It would be wise to learn how to assume a mortgage overall, so you don’t get caught by surprise when a loan starts to seem overwhelming halfway through.

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.

No point1 point
Cost per points$0$2,000
APR4.5%4.25%
Monthly payment$1,013$983
Monthly savings$0$29
Total savings on a 30-year term$0$10,616

Who Pays 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.

Your Closing Costs Do Not Include Mortgage Points, So What Do They Include?

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.

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.

Are Points the Right Decision for You?

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.

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.