Points vs. Closing-Cost Credits: What’s the Difference?

When you’re preparing to buy a home, you’ll probably hear a lot about interest rates, monthly mortgage payments and closing costs. But as you compare mortgage options, you may also come across two terms that can sound confusing: mortgage points and lender credits.

Both can affect the amount of money you pay upfront when getting a mortgage, but they work in opposite directions.

Understanding the difference can help you ask better questions, compare loan options and decide which approach may fit your financial situation.

If you’re planning to buy a home in South Carolina, here’s what you should know.

What Are Mortgage Points?

Mortgage points, also called discount points, are fees you can pay upfront to receive a lower interest rate on your mortgage.

Generally, one discount point costs 1% of your loan amount. However, the amount your interest rate decreases for each point varies by lender, loan type and market conditions.

For example, if you have a $300,000 mortgage, one discount point would generally cost $3,000.

In exchange for paying that cost upfront, your lender may offer a lower interest rate, which could reduce your monthly principal and interest payment.

Why Would a Buyer Pay Mortgage Points?

Some buyers choose to pay points because they want a lower interest rate and expect to keep the mortgage long enough for the monthly savings to offset the upfront cost.

For example, if paying points costs you an additional $3,000 at closing, you’ll want to understand how much the lower rate could save you each month and how long it would take to recover that initial expense.

That calculation is often called the break-even point.

Paying points may be worth exploring if you have funds available upfront and expect to keep the loan for a longer period. However, the best choice depends on the actual numbers and your plans.

What Are Lender Credits?

Lender credits generally work in the opposite direction.

Instead of paying an additional upfront fee to obtain a lower interest rate, you accept a higher interest rate in exchange for a credit that can reduce certain closing costs.

This may appeal to buyers who want to preserve more of their savings for moving expenses, furniture or other costs associated with purchasing a home.

For example, a lender may offer one mortgage option with a lower rate and higher upfront costs and another with a slightly higher rate and a lender credit.

The second option could reduce the cash you need at closing, but it may also mean a higher monthly principal and interest payment.

Lender credits do not necessarily cover every closing expense, and the amount available depends on the loan terms and lender’s offer.

The Consumer Financial Protection Bureau explains this trade-off in its guide to mortgage points and lender credits. This resource can help you understand how paying more upfront or accepting a higher interest rate can affect your mortgage costs.

Mortgage Points vs. Lender Credits: What’s the Difference?

The main difference comes down to how you want to balance upfront costs and your ongoing mortgage payment.

Mortgage points: You pay more upfront to obtain a lower interest rate.

Lender credits: You receive a credit toward eligible closing costs in exchange for accepting a higher interest rate.

Neither option is automatically better. The right choice depends on your available savings, monthly budget, loan terms and how long you expect to keep the mortgage.

Which Option Could Make More Sense for You?

Let’s look at a few situations where you might want to explore each option.

You May Want to Consider Mortgage Points If…

You have enough money available to cover the additional upfront cost without putting too much pressure on your finances.

You want to explore the possibility of lowering your monthly mortgage payment.

You expect to keep the mortgage long enough that the monthly savings could outweigh the cost of the points.

Before choosing this option, ask your lender to calculate the break-even point and show you what your payment would look like with and without points.

You May Want to Consider Lender Credits If…

You want to reduce the amount of cash you need to bring to closing.

You prefer to preserve some of your savings for moving expenses and other immediate needs.

You are comfortable comparing a potentially higher monthly payment against lower upfront costs.

Remember that reducing your upfront costs does not necessarily reduce the total cost of the mortgage. A higher interest rate can mean paying more interest over time.

Can You Compare Both Options Before Making a Decision?

Absolutely. In fact, comparing different loan scenarios is one of the most useful steps you can take when shopping for a mortgage.

Ask your lender to show you at least three options:

1. A mortgage with no discount points and no lender credits, if available.
2. A mortgage with discount points and a lower interest rate.
3. A mortgage with lender credits and a higher interest rate.

Compare the interest rate, monthly principal and interest payment, upfront costs, estimated cash to close and the total cost over the period you expect to keep the loan.

You can also review the Consumer Financial Protection Bureau’s guide to choosing a mortgage that fits your needs for additional help understanding the trade-offs between different mortgage options.

When reviewing your options, make sure you’re comparing the same loan amount, loan type and term. Otherwise, you may not be making a fair comparison.

What About Seller Credits?

You may also hear about seller credits during the home-buying process.

Seller credits are different from lender credits. A seller credit is a contribution the seller agrees to make toward certain eligible buyer costs as part of the transaction, subject to the purchase agreement and applicable loan rules.

Depending on the loan program and transaction, an allowable seller contribution may help cover certain closing costs or other permitted expenses. In some cases, eligible costs may include discount points used to reduce the interest rate.

However, seller credits are subject to program-specific limits and cannot necessarily be used for every expense.

This is one reason it’s helpful to discuss your financing goals with your lender and your real estate agent before finalizing an offer. Understanding what may be permitted can help you explore options that fit your situation.

Questions to Ask Your Lender Before Choosing

Before deciding between mortgage points and lender credits, consider asking:

1. What would my interest rate and monthly payment be with no points or credits?
2. How much would I pay upfront for discount points, and how much could my payment decrease?
3. How much lender credit could I receive, and what would my interest rate and payment be?
4. How long would it take for the savings from paying points to offset the upfront cost?
5. What would happen if I sold the home or refinanced before reaching the break-even point?
6. Can any seller contributions be used toward eligible closing costs or discount points for my loan?
7. How do the total costs compare over the period I expect to keep the mortgage?

Your lender can provide estimates based on your specific loan and explain which options are available to you.

The Bottom Line

Buying a home involves more than choosing a purchase price and securing an interest rate. Understanding how different mortgage options affect your upfront expenses and monthly payment can help you make a more informed decision.

Mortgage points may help lower your interest rate in exchange for a higher upfront cost. Lender credits may help reduce certain upfront costs in exchange for a higher interest rate.

The goal isn’t simply to choose the lowest rate or the smallest amount due at closing. It’s to understand the trade-offs and find an option that makes sense for your budget and plans.

If you’re thinking about buying a home in Lexington, Columbia or the surrounding Midlands of South Carolina, I’m here to help you navigate the real estate side of the process and connect with trusted professionals who can answer your financing questions.

Make Moves with Faith

Faith Morris | ERA Wilder Realty

Serving Lexington, Columbia and the Midlands of South Carolina

This article is for educational purposes only and is not financial or mortgage advice. Mortgage rates, lender credits, discount point costs, loan eligibility and program requirements vary. Consult a qualified mortgage lender about your individual circumstances.