Buying a home can be a stressful time. In fact its often the biggest financial transaction that any of us will be involved in. The terms associated with getting a loan can add to the stress levels if you don’t understand them. That is why its worthwhile getting acquainted with the various terms.
One of the concepts that I had trouble understanding when getting a mortgage loan was the points system. I kept hearing the realtor and then the mortgage broker talking about points. The problem was I was not getting the point!!
Mortgage lenders such as banks and other financial institutions may discuss with you loan amounts, down payments, loan interest rates and points. The loan amount is the total amount you will be borrowing. The down payment is the amount of cash you will have to pay before securing the loan. The interest rate is the percentage that will be added to the loan amount that you pay. So what is a point?
A point can be described as a fee that equals one percent of the loan amount. It is not unusual for a lender to charge zero, 1, 2, 3 or 4 points.
Points usually take two forms and can be either discount points or origination points.
Discount points represent prepaid interest on the mortgage loan. This can lower your interest rate. Therefore the more points that you pay then the lower interest rate you pay. Discount points are tax deductible.
Origination points consist of fees that are charged by the lender and cover the cost of making the loan. It can be tax deductible if it is used to get the mortgage and not to pay closing costs such as inspections and notary costs.
The amount of points that you decide upon depends on how much money you will be using as your down deposit and circumstances such as how long you expect to own the property. If you plan to own it for an extended period it may be in your favor to use them to reduce the interest rate. However you may want to go with zero points if you need to reduce your closing costs.
You can quickly figure out your mortgage costs by using a mortgage payment calculator. It makes the financial side of things easy.