Points are one-time fees paid at closing (consummation). They are also commonly referred to as “discount points“ or “buy-downs”. They are the cost of buying the interest rate down to a lower rate on a mortgage. Most interest rates are available in increments of 0.125% (think 4.125%, 4.25%, 4.375%, etc), however the market does not move in increments of 0.125%. So if interest rates for a given loan product are at 4.25% (hypothetically), the points would be the cost of buying that rate down to 4.125% or lower.
Bona Fide points are the true cost to the lender to acquire the lower rate on your behalf. If a discount point is not bona fide, it means that the lender is charging above the cost of actually acquiring that lower rate. Generally, you as the borrower are responsible for the cost of the discount points.
Historically “points” generally equalled 1% (or 100 basis points) of the loan amount. However, with bona fide discount points, it is the true cost of acquiring that lower rate and that can vary drastically. In addition to buying the interest rate down, points can also be charged for certain services (origination for example) and/or closing costs. At Network Funding though, we only allow for bona fide discount points pertaining to interest rates, as we charge a flat rate for all of our closing costs/services.
If you’re trying to determine whether you should purchase discount points, ask your Loan Officer. The easiest calculation is to compare the cost of acquiring the lower rate, divided by the difference (savings) in your monthly payment from one rate to the next. This will tell you how many months it will take before you recover the cost of the buy-down. Sometimes it is worth it, sometimes it is not.
Your Loan Officer is here to help you make that decision.