Points

What Are Points in Real Estate Lending?

In mortgage lending, points are fees paid to a lender at closing, where each point equals 1% of the loan amount. On a $250,000 loan, one point costs $2,500. There are two distinct types of points that serve different purposes: origination points, which are lender fees for processing and funding the loan, and discount points, which are prepaid interest used to buy down the interest rate. Understanding the difference between these two types is essential for evaluating the true cost of any loan.

Origination Points: The Lender Fee

Origination points are the lender's fee for making the loan. They compensate the lender for underwriting, processing, and funding. Conventional and DSCR loans typically charge 0 to 1 origination point. Hard money lenders commonly charge 2 to 4 origination points because their loans involve more risk and shorter terms. Origination points are a cost of borrowing and are factored into the total cost of the loan. When comparing lenders, add origination points to all other fees for an apples-to-apples comparison.

Discount Points: Buying Down Your Rate

Discount points allow you to pay upfront interest at closing in exchange for a lower interest rate over the loan term. Typically, one discount point reduces your rate by 0.25%, though this varies by lender and market conditions. On a $300,000 30-year loan, one discount point costs $3,000 and might reduce your rate from 7.25% to 7.0%, saving about $50 per month. The question is whether that $3,000 upfront investment is worth the ongoing monthly savings.

Break-Even Analysis on Discount Points

The break-even point is how long you need to hold the loan before the monthly savings from discount points exceed the upfront cost. If one point costs $3,000 and saves $50 per month, the break-even is 60 months or 5 years. If you plan to hold the property and the loan for 10 years, buying points is profitable. If you plan to sell or refinance in 3 years, buying points loses money. Always run this calculation before paying for discount points. For short-term holds and BRRRR properties you plan to refinance, paying discount points rarely makes financial sense.

Points in Hard Money and Bridge Lending

Points take on outsized importance in hard money and bridge loans because the terms are short and the point charges are high. A hard money loan with 3 origination points on a $200,000 loan costs $6,000 at closing. If the loan term is only 12 months, those 3 points are effectively adding 3% to your annual cost of borrowing. When comparing hard money lenders, model the total cost including points, interest, fees, and expected hold period. A lender charging lower points but a higher rate may be cheaper or more expensive depending on how long you hold the loan.

Strategic Thinking About Points

Points are a lever in loan negotiation. Some lenders will reduce points in exchange for a higher rate, or vice versa. Ask for both options and calculate which is better for your specific situation. On long-term holds, lower rates usually win. On short-term deals, lower points usually win. When analyzing investment property deals, always include point costs in your total acquisition cost calculation. They reduce your initial return and affect your cash-on-cash metrics. Never overlook points when comparing financing options, and always push back because points are often negotiable.