When a homebuyer goes to a lender for a new mortgage, the cost of the loan can include fees that the lender quotes in "points." Lenders calculate each of these types of mortgage points the same way.
A mortgage point is one percent of the loan amount. One point on a $100,000 loan is $1,000. A point on a $250,000 loan is $2,500. One and a half points on the same loan would be $3,750 and two points, $5,000. The mortgage fees charged as points are always calculated as a percentage of the loan.
Lenders charge origination fee points to process and complete the paperwork for a mortgage loan. The origination fee is part of the lender's commission or earnings on a mortgage. A one-point origination fee is most common. Some lenders charge two or more points for origination. A lender may charge a homebuyer with unusual financial circumstances requiring a specialized mortgage a larger origination fee.
Discount points are the fee the lender charges to award a loan at a certain interest rate. A lender will adjust the discount points to account for small changes in market rates and keep the quoted rate at a competitive level. For example, in mid-January 2011, Bank of America was quoting the standard 30-year fixed-rate mortgage at 4.75 percent plus 0.625 points. A homebuyer can elect to pay additional points to get a lower rate. On a 30-year mortgage, one discount point will typically buy the mortgage rate down 0.25 percent.
Mortgage points are variable fees that can differ from lender to lender. Compare rate quotes by having the lenders quote the total points for the same interest rate. Points are points, no matter how the lender labels them. A one-point origination fee plus one-point discount fee costs the same as two discount points with no origination fee, for example.