What are Mortgage Points? Great question, mortgage points are often called origination fees. These are fees a mortgage lender or broker will charge you for doing your home loan. A mortgage Point is one percent of the total purchase price of your loan amount. For example if you have a $200, 000 loan 1 point would equal $2,000. Lenders justify charging points in a couple of different ways. They either call the points discount points to give you a better rate or they call them an origination fee as services rendered for doing the loan. Many times a lender will charge both a discount point and an origination fee.
Definitions of Origination Fee and Discount Points.
Origination Fee – A fee charged by the lender for processing a borrowers loan application. The fee is calculated in points as a percentage of the loan, and is due at the closing.
Discount Points – are prepaid interest by a borrower which in effect reduces the interest rate on the loan. By purchasing discount points a person may receive a lower interest rate and save in the long run. Depending on your situation and the length you plan to stay in the purchased home you may save a bundle in the long run by investing in the discount points.
Why Pay Mortgage Points
One of the most common asked mortgage questions is what are mortgage points and should I pay them? When you pay mortgage points generally a person pays 1 to 3 points for a typical loan. Points can be negotiated and if you do not like how much the lender is charging you you have the right to shop around.
It is important to remember most loan officers earn their commission from a portion of selling mortgage points. 1 to 3 points is typical for your average home loan. Again depending on how difficult it is to close the loan a person might see 1 or 2 extra points thrown in depending on the loan. The good news for the borrower is that these origination fees are tax deductible. Consult with your accountant for all the details of your situation.
There are lenders out there that do not charge points. I would take caution, as they say there is no such thing as a free lunch. They might look good just to get you in the door, but you may find out later the you paid a lot more in one area than you should have.
Things to Consider When Shopping for a Loan
When shopping for the right home loan ask yourself the following questions,
- What type of mortgage loan do I qualify for?
- Is this the right loan for this situation?
- What is the Interest Rate on This Loan?
- What is the total costs of all fees and mortgage points on the loan?
- How long do I plan on having the loan or living in the home being purchased?