What Are Points?
If you have ever gone looking for quotes on a mortgage in order to find out just what a mortgage might cost you, you have probably had the term points thrown at you. So what are points?
Each point is a fee and it is based on one percent of the total amount of the loan. There are a couple of different points, there are discount points and then there are origination points and lenders do not all charge the same amount of these points. Some lenders will charge you one point while others may charge you three.
Discount points are the points that are like prepaid interest on your loan that you are getting for your new home. Every point that you purchase will lower your interest rate to some extent. Most borrowers will be able to choose just how many points they want to purchase. There is a limit, of course, usually around three points. The number of points that you choose to buy will depend on how much you want to lower your interest rate. One especially good point of these points is the fact that they are tax deductible.
Origination fees are different. These fees are used in order to pay for the costs of giving you the loan in the first place. You don't get anything out of these points so most borrowers don't like them as they are not even tax deductible. If you can try to get a loan that does not require you to get these types of points. Discount points, on the other hand, can be useful to you.
The choices that you make concerning the points to get will be affected by a couple of different things. For example, how long are you going to be living in this house? And how much of a down payment are you going to be putting down? If you are thinking of settling into this house for the long haul then perhaps discount points are a good way for you to go. Lowering your interest rate for years to come is always a good thing. Before making your decision take stock of your situation and see what suits your needs best.
Discount points, typically referred to as just "points," are a charge by the lender paid by the borrower. 1 point = 1% of the LOAN amount (not the sales price.) So for a $500,000 loan, 1 point is $5,000. Points are paid by the borrower in exchange for a lower interest rate. The lower the interest rate, the higher the number of points the borrower must pay. The higher the interest rate, the fewer points paid by the borrower. The interest rate charging the lowest amount of points is considered the "par rate" or "market rate."
Alternatively, the borrower can select an interest rate that is higher than the current market rate and receive a credit from the lender to help pay for some or most of the costs associated with purchasing a home. The higher the interest rate, the greater the credit provided by the lender, and the lower the overall costs are to purchase or refinance a home.
It's important to note that the discount points vary from lender to lender, and they change daily until the loan is locked for a specific time period, usually 30-60 days, to close out the loan. Although there are other fees to consider, the discount points are the biggest factor when gauging a lender's "pricing" for a given loan scenario. At C2 Hawaii, we are able to compare your loan amongst our network of lenders to ensure we are only working with lenders offering the most competitive pricing.
The discount points mentioned in the previous section are considered Origination Fees or Lender Fees, since these are fees charged by the lender for originating the loan. Unlike the discount points, which are a percentage of the loan amount, the other origination fees discussed here are a fixed amount or a flat fee. These origination fees include, but are not limited to:
Underwriting or Administration Fee
Document Prep Fee
Condo Review Fee (if the property is a condominium)
Trust Review Fee (if ownership is vested in a trust)
The type of fee and the amounts charged vary from lender to lender. It's important to look at the overall picture of the total lender fees charged to you, rather than focusing on a specific origination fee.