Mortgage Points and Credits Explained

Mortgage rates are more flexible than you might think. While rates are largely based on your credit score, down payment, and other risk factors, you can also manipulate them with things called discount points and credits.

With these tools, you can get either a higher or lower interest rate in exchange for certain trade-offs — like reduced closing costs, for example.

Are you preparing to buy a home or refinance soon? Here’s how points and credits can work to your advantage.

Discount points: 

Discount points allow you to “buy down” your interest rate. You’ll pay a fee upfront, and in return, you’ll get a lower mortgage rate for the rest of your loan. This lowers your payment and your long-term interest costs.

Points typically cost around 1% of your loan amount and are due at closing time. Because of this, you’ll want to be sure you stay in the home long enough to break even on their cost (meaning the lower interest rate saves you more than it cost to acquire).

Lender credits: 

Lender credits work in the reverse direction. Instead of a lower interest rate, you’ll get a higher one — but you’ll enjoy lower closing costs as a result. This might be a good choice if you don’t have much in savings but can afford a slightly higher monthly payment.

Just keep in mind that a higher interest rate also means more long-term costs. If you don’t plan to be in the home long, though, it could be smart.

Do you have questions about points, credits, or how they could impact your mortgage application? Get in touch today.