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  • Ron Goldan | 908.253.9700
 

Everything you need to know about points

When you are working on your finances to obtain a mortgage, there are certain elements you need to understand. What is the point system? What does it mean for your finances and will it hurt your ability to obtain a loan? A lender normally provides a quote that includes both loan rates and points. If you are not aware of the points, it can be confusing to find out how they add up, and how they impact your loan terms.


 

 

What is a Point?

The point method is a fee that equals 1 percent of the loan. A loan that is 30-years for $150,000 will include 1 point which is $1,500 for 7 percent interest on the loan. Lenders can have different points for the loan, including discount points and origination points.

What are Discount Points?

Discount points are different as they are deemed prepaid interest on a mortgage loan. When you pay more points, you will obtain a lower interest rate. A borrower will pay anywhere from zero or 3 points. It depends on the lender and how much they are willing to lower their rates. The benefit to the points is that they are tax-deductible.

What is the Origination Fee?

The origination fee is charged by a lender to cover the costs of creating the loan. The origination fee is deductible if you used it to obtain the mortgage and you did not pay additional closing costs, the origination fee is can be deducted. Since this point system can be challenging to understand, work with a mortgage broker that will provide accurate information pertaining to your loan.

Should I Pay Points?

Should you pay points? Will paying the point benefit your chances of obtaining a loan? Deciding whether to pay points and how many points is based on how much money you can place as a down payment. The other factor is determined on how long you are planning to stay inside the home. The points paid as prepaid will reduce the interest rate, which reduces your monthly mortgage payment. If you do not have money to place as a down payment, you need to select the zero-point option on the loan.


 

Sources:

http://money.cnn.com/magazines/moneymag/money101/lesson8/index7.htm

http://www.bankrate.com/finance/mortgages/mortgage-points.aspx