June 30th, 2016 10:00 AM by Jackie A. Graves, President
When people want to find out how much their
mortgages cost, lenders often give them quotes that include loan rates and
What exactly is a point?
A point is a fee equal to 1% of the loan amount.
A 30-year, $150,000 mortgage might have a rate of 7% but come with a charge of
1 point, or $1,500.
A lender can charge 1, 2 or more points. There
are 2 kinds of points:
Discount points: These are actually prepaid interest on the mortgage
loan. The more points you pay, the lower the interest rate on the loan and vice
versa. Borrowers typically can pay anywhere from 0 to 3 or 4 points,
depending on how much they want to lower their rates. This kind of point is
Origination fee: This is charged by the lender to cover the costs of making
the loan. The origination fee is tax-deductible if it was used to obtain the
mortgage and not to pay other closing costs. The IRS specifically states that
if the fee is for items that would normally be itemized on a settlement
statement, such as notary fees, preparation costs and inspection fees, it is
How do you decide whether to pay points, and how
many? That depends on a number of factors, such as:
Points as prepaid interest reduce the interest
rate, an advantage if you plan to stay in your home for a while.
But if you need the lowest possible closing
costs, choose the zero-point option on your loan program.
By the numbers ...
A lender might offer you a 30-year fixed
mortgage of $165,000 at 6% interest with no points. The monthly mortgage
principal and interest payment would be $989. If you pay 2 points at closing
(that's $3,300) you might be able to drop the interest rate down to 5.5%,
with a monthly payment of $937. The savings difference would be $52 per month.
But it would take 64 months to earn back the $3,300 spent upfront via lower
payments. If you're sure you will own the house for more than 5 1/2 years, you
save money by paying the points.
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