Mortgage points and rebates. Can they help you save?

Mortgage points, and rebates, can dramatically affect your loan's interest rate costs, so you should consider them seriously.

This page:

  • Defines the two varieties of mortgage points

  • Describes how points can save (or cost) you money

  • Helps you decide if a rebate on your mortgage is right for you

In the following pages, we'll look at your down payment, PMI and other costs and options.

If you missed it, the first part of this Mortgage Basics guide explained what a mortgage is, how interest rates are set, and how the differences between various mortgage types affect you.

What are points and rebates and should you consider them?

Discount points are a very important consideration when choosing a home mortgage package, almost as important as the interest rate.

Points are fees paid at closing, with each point equal to one percent of the mortgage's value.

There are two different kinds of points, discount points and origination points.

Discount points are actually prepaid interest on your loan, so they're tax deductible and they reduce the amount of interest you pay later.

Origination points are just lender fees, and serve no purpose to the borrower. If you have decent credit, you shouldn't have to pay them. If, on the other hand, your credit is not so hot, you may have to pay them to provide the lender with additional insurance for the credit risk they'll be taking by loaning you money.

Sidebar
Our recommended prime lender, Eloan does not charge origination points, or any other lending fees, saving you thousands of dollars right from the start. For those with poor credit, Fullspectrum Lending charges the least amount in lending fees, and offers deep discounts for those who pre-qualify online.

Why should you pay discount points?
Paying discount points makes you as a borrower look more attractive to the lender. You're less of a risk if you've already paid them some interest, in cash, up front. For this reason the interest rate on a mortgage with discount points will be lower than one with no points.

Of course, paying points means you need more cash up front, and it will take a little while for the lower interest rate you're paying to make up for this initial expense. But once this ground is covered, the lower rate will pay off. This is why paying points is a better option for home buyers planning to keep their house for a while. Owners who want a lot of leverage, or home equity per dollar down, might be better off paying the higher interest rate and no points.

It depends on the nature of your investment.

What about mortgage rebates?

Rebates are basically the opposite of points. They are cash back to the borrower at closing. So, of course, they usually come with a higher interest rate.

Rebates are offered less often these days, and usually indicate that the lender is hiding some other fees elsewhere to make up for the cash advance.

There is, however, one situation in which you might want to consider something like a rebate: if you apply for a cash saver loan your lender will pay most of your closing costs, in exchange for a higher interest rate.

If you don't have much cash on hand, but would really like to buy a home now, this may your best chance. Find out more about cash saver loans in our in-depth guide to choosing the right mortgage.

In conclusion, rebates can be useful if you need some cash right away or you see your home purchase as a mainly short-term investment and want to resell soon. If you don't plan on paying the higher interest rate for that long anyway, a rebate can allow you to buy a more expensive home by freeing up cash at closing time. But if you plan on living in your home for a while, or can come up with other sources of money to pay all costs at closing, you should avoid rebates.

Next: Your down payment: how much to pay, and why

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