Negative points refer to credits mortgage lenders provide to homebuyers to help them pay their closing costs. In exchange, the buyer accepts a higher interest rate on their loan.
For homebuyers who are short on cash for closing, this could be a good solution, but it’s important to crunch the numbers and understand how negative points work.
Learn more about the pros and cons of negative points and how they impact buying a home.
Definition and Examples of Negative Points
When a mortgage has negative points, it means a lender has offered a cash rebate to the homebuyer to help offset the amount they have to pay at closing. Because the borrower pays less upfront, however, they will pay a higher interest rate for the life of the loan. The more negative points applied to the loan, the bigger the rate increase will be.
- Alternative definition: Negative points, or lender credits, are the opposite of discount points, which are upfront payments by the buyer
- Alternate name: lender credits
So what exactly does a “point” represent? One point is equivalent to 1% of the loan. For example, if a lender is giving a credit of $3,000 on a $300,000 loan, that would be one negative point. If you do decide to use negative points, the amount you are given (in the above example, it would be $3,000) will be listed in Section J of your loan estimate as a “lender credit.”
How Negative Points Work
Negative points exist as an option for homebuyers who might be struggling to come up with money for their closing costs. Borrowers can work with their lenders to decide if negative points would benefit them and if so, how many points are needed.
While one point always equals 1% of the loan, there is some variation by lender and loan type as to how much the interest rate will increase per point. A 0.25% increase is common among lenders, but you can negotiate your rate. Shop around until you find the rate that’s right for you.
Say you have a $300,000 mortgage, and you are deciding if you should accept one or two negative points ($3,000 vs. $6,000) for your closing costs. You were approved for a 30-year fixed-rate mortgage at a 4% interest rate, but each point increases your interest rate by 0.25%. Our mortgage calculator will show you how the negative points and their corresponding interest rates would impact your monthly payment, overall interest, and overall loan costs over 30 years.
|Current interest rate: 4%||Interest rate with one negative point: 4.25%||Interest rate with two negative points: 4.5%|
|Amount of lender credit given at closing||$0||$3,000||$6,000|
|Total interest paid||$215,608.52||$231,295.08||$247,220.13|
|Total mortgage cost||$515,608.52||$531,295.08||547,220.13|
As you can see, the more negative points you have, the more you’ll pay each month and the higher your total interest costs will be over the life of the loan. But there’s more to the calculation than that.
Say you accept one negative point, saving you $3,000 at closing. In that scenario, you’d pay an extra $43.58 per month—meaning it would take approximately 69 months (almost 6 years) before you pay back that lender credit. Therefore, if you knew you were likely to sell the house in three or four years, the negative point would be cost effective.
If you’re considering negative points, make sure you have room in your budget for the additional monthly expense.
Negative Points vs. Discount Points
When a discussion of mortgage points comes up, it usually refers to discount points—which is essentially the opposite of negative points. Take a look at the differences:
|Negative Points||Discount Points|
|Lender provides a rebate toward closing costs||Borrower pays extra upfront during closing|
|For each negative point received by the lender, the mortgage interest rate increases||For each point paid, the mortgage interest rate decreases by the increment agreed upon with the lender|
Pros and Cons of Negative Points
Helps to afford closing costs
Ideal if not planning to stay in the home for long
Pay a higher interest rate for the life of the loan
May overlook other assistance
Helps to afford closing costs: Sometimes, closing costs might be the last piece of the puzzle standing in the way of homeownership. Negative points can help get you there—without depleting all of your savings.
Ideal if you’re not planning to stay in the home for long: Paying less upfront makes even more sense if you know you may move in a few years, as you won’t pay the higher monthly payment for too long.
Pay a higher interest rate for the life of the loan: A higher interest rate increases your monthly payment as well as the full cost of the loan.
May overlook other assistance: Depending on your circumstances, you might be eligible for down-payment and closing-cost assistance via your state’s Housing Financing Agency—some of which may be grants that do not have to be repaid. A lender may push you toward negative points because they make out in the long run, so be sure to ask your mortgage provider about the qualifications for options that may be less costly for you.
- Negative points give homebuyers a lender credit to help pay for their closing costs. In exchange, the borrower pays a higher mortgage interest rate.
- In some circumstances, negative points can be a good move, especially if it helps you avoid depleting your savings.
- If you don’t plan on staying in the home for long, negative points can be cost effective.
- Negative points are the opposite of discount points (upfront payments made by the borrowers that reduce their mortgage interest rate).