Image courtesy of Flickr, David Goehring
Understanding what mortgage points are, how to calculate them and how they affect you is the key to choosing the right mortgage with the best interest rate and terms.
The idea of mortgage points can seem quite overwhelming at first. However, once you know exactly what mortgage points are and understand the different types that are available, you will know how to make them work for you instead of being intimidated by the concept.
Mortgage points are fees charged by a mortgage lender or broker, with each point being equal to 1% of the loan amount. There are two different types of points, origination points and discount points. They each serve different purpose, even though the way you calculate them is the same.
Discover the two different types of points and how they affect your mortgage loan. Understanding points can help you make better decisions about your home purchase or refinance.
Origination points are a type of fee that borrowers pay the lender or broker to handle all of the approval stages and paperwork involved in the deal. This includes evaluation, processing, approval and funding of the loan. The origination fee is calculated using a "point method." It could be 1 point (1% of the loan), 2 points (2% of the loan), and so on.
If you have a $350,000 loan amount, then a 1 point origination fee (equal to 1%), would cost you $3,500.
This type of fee is calculated based on your credit history as well as the qualification requirements of the lender, which is why you will see variations in origination fees.
Discount points are different from origination points. They are not a fee, but are instead a type of prepaid interest that borrowers pay. A borrower purchases points which lower the amount of interest they will have to pay on future mortgage payments.
Typically each discount point costs 1% of the loan amount, and each point typically lowers your interest rate anywhere from one-eight (0.125%) to one-fourth (0.25%) of a percentage from the interest rate you initially qualified for.
If you initially qualified for a 4.00% interest rate on a $350,000 loan, then you can pay 1% of the loan amount ($3,500) to lower you interest rate from 4.00% to anywhere from 3.875% to 3.75%.
The difference will vary depending on which lender you use, and the difference in monthly payments can be significant, so be sure to take your time when making a decision on whether or not to purchase discount points.
While origination points are not tax deductible, the discount points you pay are tax-deductible if they meet a certain list of requirements outlined on the IRS website. The list of requirements are:
Now that you understand what mortgage points are, and the two different types, you can follow along when your lender starts talking about the various options available to you. Spend some time crunching the numbers and perhaps using a closing cost calculator so that you can narrow down the best options for you more easily.
Homebuyers and borrowers looking to refinance who do their research ahead of time are less likely to find themselves in a situation they cannot handle. There are countless instances where people get too excited about the buying or refinance process and dive in by taking the first mortgage offered to them. Having an understanding of mortgage points will help you to make the best for you and your family.
Real estate agents receive commissions from home buyers and sellers, collectively earning over $50 Billion per year. Learn how commission amounts are set, who pays them, and how they work in this article. Read more.
List of secured property tax rates for all counties of California fiscal year for 2014-2015. Read more.
If you live in California and are over the age of 55 you can effectively reduce your property taxes when buying a new home. Read more.
You've heard the term used before, but what does loan closing mean? Find out all you need to know about the process. Read more.
Foreign real estate investment in the United States, both commercial and residential, is a huge phenomenon that is only expected to accelerate, maybe even to skyrocket, in 2016. Read more.
Houston Vs. Dallas? If you are considering moving to either of these major metropolitan areas, we've created a resource to help you make the decision process a little easier. Read more.
Whenever there is money to be made or money to be spent, some unscrupulous folks will take advantage, trying to game the system or commit all-out fraud. Read more.
In this article, we explore how homeowners insurance works and what happens in the event of a house fire. Read more.
Your DTI is used by mortgage lenders to determine whether you qualify for a loan, and if so, for how much. Improve your DTI with these 16 tips. Read more.
A bankruptcy will make it very difficult to attain a home loan. These 5 tips will help you re-establish your credit quickly in order to qualify for a home loan. Read more.