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Mortgage Points - What are the types and how do you benefit?

Author: evolovik26 Post Date: 24th Nov, 2007 07:03 am Post Subject: Mortgage Points - What are the types and how do you benefit?
Mortgage Points are what you pay for the lender's costs of making the loan. Points are also a kind of prepaid interest which can help you get a lower rate on your mortgage. Each point equals 1% of the principal loan amount.

What are the types of mortgage points?


There are 2 types of mortgage points as given below:
  • Discount Points:
    Such points are prepaid interest which when paid helps you in getting a reduced rate of interest. The higher points you pay the lower will be your mortgage rate. You can pay up to 3-4 points on your loan depending upon how much you'd like to reduce the mortgage rate. Know more..


  • Origination Points:
    These points are charged by the lender as part of the costs in originating or processing the new loan. It may include notary fees, inspection costs, appraisal fees etc.

Is paying points worth it?


If you're staying in the property for long, it makes sense to pay discount points. Calculate the break even period during which you'll be able to recover the points paid upfront. If your period of stay in the house exceeds the breakeven period, you'll be able to save by paying points.


Let's take an example:

Say, you have taken a loan amount worth $200,000 at 8% rate with 0 points. For a 30 year fixed rate mortgage, the monthly payments will be $ 1467.53. Now if you pay 1 point, the rate is reduced by 0.25%. So, you can get a lower rate as 7.75%. At the new rate, the monthly payments will drop to $ 1432.82. So, the difference or your savings is $ 34.71 per month.


you pay by your savings per month i.e by $34.71


Number of months to recover the points (Break-even period) = 2000/34.71 = 57 months (approx.)


So, you'll actually start saving in interest, 57 months or 4 years and 9 months after you pay points. Thus, if you don't stay in the property for long, you won't save enough after the breakeven period is over. You may use the Mortgage Points Calculator to find out how much you'll save by paying discount points.

Are mortgage points tax-deductible?


Discount Points are tax deductible only when you itemize your deductions. However, you need to fulfill certain criteria to deduct points on your purchase mortgage in the year they're paid.

However, if it's a refinance mortgage, then you can deduct points over the loan period. Know more on how to deduct points from the article on discount points.
Posted on: 24th Nov, 2007 07:03 am
Please explain what points are for.
A point in mortgage terms is a value that is equal to 1% of a loan amount.
When loan officers talk about points among themselves they are usually talking about how much fees they are charging for a particular loan.
Example ( I am making 2 points on this deal = He is charging 2% of the loan amount to get the deal done )
When loan officer talking with lender points usually mean Yeld spread (points that a lender pays to loan officer for getting the deal done)
When a loan officer talks about points with the client/borrower they are usually talking about the origination fee (points being charged from the client to get the deal done)
Another form of points are discount points and these are paid by the borrower/client to the lender to reduce their interest rate on the loan.

Most people seeking a loan today think that points is what is loan going to cost them which is incorrect.

There are many ways to define points and their meaning. This is why any borrower should look at the bottom line and not the points. Any good salesman can present the points in a variety of ways to you. So try to go with someone you trust and don't concentrate on points as they are not the bottom line.
Posted on: 24th Nov, 2007 01:14 pm
Hi carlark,

Welcome to this forum.

Points are also known as discount points. These are some kind of fees that the lenders charge at closing. If the borrower pays these points, he may be offered lower interest rates for the entire loan period.

Eugene has given you some very good information regarding points and I agree with him that the buyer should look the net amount that they need to pay. Points are some kinds of baits to attract the buyers.

There is an article regarding Discount points. You can check it out- http://www.mortgagefit.com/discount-point.html

Feel free to ask if you have any further questions.

Thanks,
Larry
Posted on: 26th Nov, 2007 01:19 am
How did you get 0.25%. , why ? 1 point, the rate is reduced by 0.25%

thanks
Posted on: 09th Dec, 2008 01:41 pm
Hi Guest,

This is a general practice among the lenders that if you pay 1 point your interest rate will be reduced by 0.25%.

Thanks
Posted on: 10th Dec, 2008 10:26 pm
Would you please explain
1. what are Front and back point?
2. how does commision loan generate?
Thanks,
Posted on: 15th Dec, 2008 07:17 pm
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