Point (mortgage)

Point (mortgage)

Points, sometimes also called a "discount point", are a form of pre-paid interest. One point equals one percent of the loan amount. By charging a borrower points, a lender effectively increases the yield on the loan above the amount of the stated interest rate. Borrowers can offer to pay a lender points as a method to reduce the interest rate on the loan, thus obtaining a lower monthly payment in exchange for this up-front payment. For each point purchased, the loan rate is typically reduced by 1/8% (0.125).[1]

Paying Points represent a calculated gamble on the part of the buyer. There will be a specific point in the timeline of the loan where the money spent to buy down the interest rate will be equal to the money saved by making reduced loan payments resulting from the lower interest rate on the loan.

Selling the property or refinancing prior to this break-even point will result in a net financial loss for the buyer while keeping the loan for longer than this break-even point will result in a net financial savings for the buyer. The longer you keep the property financed under the loan with purchased points, the more the money spent on the points will pay off. Accordingly, if the intention is to buy and sell the property or refinance in a rapid fashion, buying points is actually going to end up costing more than just paying the loan at the higher interest rate.

Points may also be purchased to reduce the monthly payment for the purpose of qualifying for a loan. Loan qualification based on monthly income versus the monthly loan payment may sometimes only be achievable by reducing the monthly payment through the purchasing of points to buy down the interest rate, thereby reducing the monthly loan payment.

Discount points may be different from origination fee or broker fee. Discount points are always used to buy down the interest rates, while origination fees sometimes are fees the lender charges for the loan or sometimes just another name for buying down the interest rate. Origination fee and discount points are both items listed under lender-charges on the HUD-1 Settlement Statement.

The difference in savings over the life of the loan can make paying points a benefit to the borrower. If you intend to stay in your home for an extended period of time, it may be worthwhile to pay additional points in order to obtain a lower interest rate. Any significant changes in fees should be re-disclosed in the final good faith estimate (GFE).

Also directly related to points is the concept of the 'no closing cost loan'. If points are paid to acquire a loan, it is impossible at the same time for a broker bank or lender to make a premium for a higher rate. When premium is earned by making the note rate higher, this premium is sometimes used to pay the closing costs.

References

  1. ^ "Ginnie Mae: Your Path to Homeownership". http://www.ginniemae.gov/4_home/closing_cost.asp?section=YPTH. Retrieved 2008-02-17. 

External links

  • irs.gov/publications/p936 - IRS Form 936 defines a point for the purpose of deducting mortgage interest for U.S. income taxes

Wikimedia Foundation. 2010.

Игры ⚽ Поможем сделать НИР

Look at other dictionaries:

  • Point — may refer to the following: Contents 1 Business and finance 2 Engineering 3 Entertainment …   Wikipedia

  • mortgage — /morgaj/ A mortgage is an interest in land created by a written instrument providing security for the performance of a duty or the payment of a debt. At common law, an estate created by a conveyance absolute in its form, but intended to secure… …   Black's law dictionary

  • mortgage — /morgaj/ A mortgage is an interest in land created by a written instrument providing security for the performance of a duty or the payment of a debt. At common law, an estate created by a conveyance absolute in its form, but intended to secure… …   Black's law dictionary

  • Mortgage loan — Mortgage redirects here. For other uses, see Mortgage (disambiguation). Finance Financial markets …   Wikipedia

  • Mortgage fraud — is crime in which the intent is to materially misrepresent or omit information on a mortgage loan application to obtain a loan or to obtain a larger loan than would have been obtained had the lender or borrower known the truth. In United States… …   Wikipedia

  • Mortgage life insurance — is a form of insurance specifically designed to protect a repayment mortgage. If the policyholder were to die while the mortgage life insurance was in force, the policy would pay out a capital sum that will be just sufficient to repay the… …   Wikipedia

  • Mortgage underwriting in the United States — is the process a lender uses to determine if the risk of offering a mortgage loan to a particular borrower under certain parameters is acceptable. Most of the risks and terms that underwriters consider fall under the three C’s of underwriting:… …   Wikipedia

  • Mortgage underwriting — is the process a lender uses to determine if the risk (especially the risk that the borrower will default[1] ) of offering a mortgage loan to a particular borrower is acceptable. Most of the risks and terms that underwriters consider fall under… …   Wikipedia

  • point — n 1: a particular detail, proposition, or issue of law; specif: point of error 2: any of various incremental units used in measuring, fixing, or calculating something: as a: a unit used in calculating a sentence by various factors (as aggravating …   Law dictionary

  • Mortgage (disambiguation) — Mortgage may refer to: Mortgage loan, a loan secured by a mortgage on real property Mortgage, a security interest on real property grant to a lender, as in mortgage law deed, the mortgage document Hypothec, a specie of encumbrance See also… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”