RESEARCH & LEARN

# Positive and Negative Mortgage Points Explained

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Positive and negative mortgage points are often used by lenders to give buyers more options. Positive and negative mortgage points are basically a way to manipulate the rate that you are being offered. Understanding how they work can help you get a mortgage that you are comfortable with. When you are potentially going to be paying for something for 30 years, you want to feel good about it. Here are the basics of positive and negative mortgage points.

Positive Mortgage Points
Positive mortgage points have the effect of lowering your interest rate over the life of your loan. If you are willing to pay more money upfront, your mortgage rate will be lower for the rest of the term. One mortgage point is the equivalent of one percent of the total loan. Therefore, if you are buying a \$100,000 house, you will have to pay \$1,000 for each point that is requested of you.

For example, let's say that you are taking out a \$100,000 mortgage and you are being offered an interest rate of 6.5 percent. If you want to lower the interest rate, you are given the option to pay two points. If you pay two points, they will lower the rate down to 6.25 percent. Therefore, you have to decide whether or not it is worth coming up with \$2,000 on the front end to save you .25 percent over the life of your loan. It will result in a smaller mortgage payment for you, which can help you every month for the next 30 years. Consider how much the slightly lower payment is worth for you.

Negative Mortgage Points
Negative mortgage points work very much like positive mortgage points except in reverse. Instead of you paying the bank to lower your rate, the bank will pay you to take a higher rate. In our previous example, you were offered a rate of 6.5 percent on your \$100,000 loan. The bank is now offering you two points to raise your rate to 6.75 percent. Therefore, they are basically giving you \$2,000 in order to raise your interest rate. This will also result in you paying a higher mortgage payment each and every month.

While they are offering you points, they don't usually end up writing you a check for the money. Most of the time, the points will just be applied to your closing costs on the loan. Closing costs typically result in a few thousand dollars of out-of-pocket expense. If you do not come up with them out-of-pocket, they are rolled into the body of the loan and increase your payment. Therefore, having most of the closing costs taken care of for you can be a great help.

Which is Better?
There is no right answer when dealing with positive and negative mortgage points. They can both be useful in different situations. Consider what they are offering and decide if it is worth it for your long-term financial situation.