Home Mortgage Terms You Should Know: Points
Understanding Points
Points are fees paid to obtain a home mortgage. Each point
is one percentage point of the total loan amount. Thus,
one point (one percent) of a $100,000 loan is $1,000. The
word “points” is often used in two ways: for
loan origination points and discount points.
For example, you may pay mortgage points to the lender
in order to reduce your overall interest rate. These are
more commonly known as discount points since they literally
discount the interest rate of the loan. Actually it is like
paying prepaid interest on the loan you are taking out.
Loan origination points are fees lenders charge to start
the loan process. The points or even fractions of points
often differ among lenders. Some don’t charge any
points and that is why comparison-shopping is important.
Understanding Discount Points
Discount points are another fee altogether. Here again,
one point equals one percent of the total loan amount. The
numbers of points charged varies by place, time, and lender
and with the mortgage and investment climate. More points
may be charged if a borrower has credit problems and is
a risk. In that case, lenders also may require a higher
mortgage rate than advertised. Those with shaky credit may
find they have to pay two, three, or four times as many
points as others with good credit. That’s why keeping
a good credit history and comparing all the costs of a mortgage
is so important.
Discount points traditionally can be calculated at one point
equaling about 1/4 to1/8 of a percent off of the interest
rate you will be paying for the loan. Since these are classified
as interest payments, they are tax deductible. In the case
of a refinanced loan this may not be true in all states
but with all new mortgages this is accurate.
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