Understanding Mortgage Points
Mortgages can be very complicated things to dissect and
understand.
They contain a variety of different components, and unless
you are a trained professional, they can be very difficult
to figure out.
In addition to interest rates, down payments and terms;
mortgages also contain “points.”
An article on Bankrate.com, from June 14, 2006, entitled,
“Points,” gives a good explanation of these
tricky little figures.
“When people want to find out
how
much their mortgages cost, lenders often give them
quotes that include both loan rates and ‘points.’”
So now you may be asking yourself, ‘What exactly
is a point?’ Most people have heard this term before
but never actually understand what it is. Today we will
get to the bottom of it.
“A point is a fee equal to 1 percent of the loan
amount. A 30-year, $150,000 mortgage might have a rate
of 7 percent, but come with a charge of 1 point, or $1,500.
A lender can charge 1, 2 or more points. There are two
kinds of points -- discount points and origination points.”
So the points can be seen as something in addition to
the normal interest rates and fees.
Discount points can be seen as prepaid interest on
the
loan you take out. There are a couple of good benefits
to this type of point.
“These are actually prepaid interest on the
mortgage
loan. The more points you pay, the lower the interest
rate on the loan and vice versa. Borrowers typically can
pay anywhere from zero to 3 or 4 points, depending on
how much they want to lower their rates. This kind of
point is tax-deductible.”
An origination fee is a different kind of point than the
discount point. The lender actually charges the origination
fee to cover the costs of developing the loan.
“The origination fee is deductible if it was used
to
obtain
the mortgage and not to pay other closing costs. The
IRS specifically states that if the fee is for items that
would normally be itemized on a settlement statement,
such as notary fees, preparation costs, and inspection
fees, it is not deductible.”
A lot of the times you have an option on how many points
you can pay. The amount of points one person should pay
depends on a lot of different factors. It all depends
on if the points are affecting interest rates and the
amount of the loan and so on.
So now the question is, ‘How many points should
I take out?’
“That depends on a number of factors, such as how
much money you have available to put down at closing and
how long you plan on staying in your house. Points as
prepaid interest help reduce the interest rate. If you
plan to stay in your home for a while, it may be worth
reducing the interest rate by paying points. The best
option depends on your
individual
needs, but, if you need the lowest possible closing
costs, choose the zero-point option on your loan program.”
Although mortgage points can be a bit difficult to understand,
there are a variety of options available that will be
suitable for your individual needs.