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

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 24th Nov, 2007 07:03am
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-

Feel free to ask if you have any further questions.

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

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%.

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?
Posted on: 15th Dec, 2008 07:17 pm
Welcome Kevin Q,

Front end points are also known as loan origination fees. It is 1% of the total amount that you are borrowing for your home loan. They are used to counteract the interest rate that you will pay on your home mortgage loan. Back end points occur if you decide to enlist an assistant of a broker to find you a lender for your home mortgage loan. This will show up as yield-spread-premium.
Posted on: 15th Dec, 2008 11:22 pm
1. the front point(s) of a loan are something the consumer can see (good faith estimate). the back point(s) are built in to an upsell on an interest rate and are hard to discover because of a rate that changes daily unless locked down. if your shopping for a loan, please request the premium the broker will be making on the back end. tell them you are shopping this number to other shops and if they want your business it had better be competative.

2. not sure about your second question however i think your refering to a commissioned agent working on the loan itself. so here we go, the commission (closing costs) on a purchase loan are traditionally brought to the signing table by the home-buyer. on a refinance loan, the commission (closing costs) is rolled into the loan amount to ease the burden of cash out of pocket.

keep in mind, if your working with a bank you will not have access to their back end points. there agents are usually paid out based on units and volume.

when working with a mortgage broker, the commissionable fees are made out to the mortgage company (broker of record) and dispersed accordingly to that particular shop. they may have sales agents that work for a commission of the commission.

both entites are a pay for performance environment.
Posted on: 16th Dec, 2008 08:53 am
Thanks Adonis and parmoney for your respomse.

Who pay for loan commission to mortgage company any loan officer? How many % can you show me the calculation.

Thanks you in advance.
Posted on: 17th Dec, 2008 07:49 pm
Hi Kevin Q

As far as I know, a loan officer gets a commission from the mortgage company for his/her services. They are paid commission on the value of the loans they place. As the real estate market slows down, they often suffer a decline in earnings and may even be subject to layoffs.

As far as your question is concerned, can you explain what are you trying to mean when you say "Who pay for loan commission to mortgage company"?

Posted on: 18th Dec, 2008 01:47 am

Mr. Smith is buying a new house but needs financing to own it. He hires mortgage broker (who has several sales agents working for them) to secure favorable terms on the home loan. Mr. Jones (sales agent working for mortgage broker) qualifies him and charges $5000 in fees for their services. Mr. Smith is happy with the program and agrees to move forward. A couple weeks later the financing is in place and it is time to close the transaction. Mr. Smith signs the final paperwork and provides funds for the $5000 and the down payment for the house to escrow.

Mr. Smith moves into his new home and the mortgage broker receives a check for $5000. Now the sales agent (Mr. Jones) who is working for mortgage broker has an agreement in place to receive 40% of said commision. Mortgage broker cuts a check for $2000 to sales agent.
Posted on: 18th Dec, 2008 08:08 am
I purchased 1 3/4 points at a bank, then got a better offer from my current lender, I already had the appraisal with the bank. Can I get my money back for the points??
Posted on: 02nd Feb, 2009 06:48 pm
with discount points, how are the costs of each point calculated? Can you buy points on a fixed rate mortgage only or are they available on all types of loan? Do the prices change if you have a 20 year mortgage vs a 30 year fixed mortgage or are they basically a set amount?
Posted on: 20th Oct, 2011 06:02 pm
Hi rugbymad,

You can pay discount points for all types of loans. Discount point is a type of prepaid interest mortgage which borrowers can purchase. This lowers the amount of interest that they will later on pay. Each discount point generally costs 1% of the total loan amount. Each point lowers your interest rate by one-eighth to one one-quarter of your interest rate. Moreover, these discount points are tax deductible as well.

Posted on: 20th Oct, 2011 10:27 pm
Posted on: 14th Dec, 2011 02:31 am
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