November 28th, 2024 11:18 AM by Sam Kader MLO130505
When people want to find out how much their mortgage cost, we are required to provide quotes that include loan rates and points. What exactly is a point? A point is a fee equal to 1 percent of the loan amount. For example, a 30-year fixed loan at $150,000 with a rate of 3.5% and a 0% discount point. However, if you pay 1 point, it will reduce a rate from 3.5% to 3.25% (in general). 1 point is 1% of the total mortgage amount - in this case $1,500. You will be able to see any points listed on your Loan Estimate.
Do I have to pay points? Not everyone has to pay "Points" but depending on the loan program, "Points" maybe an automatic charge. For example, Fannie Mae will charge "Points" on all Fannie Mae backed loans unless your down payment is 40% or more no matter how good your FICO score are. Points can be good points and bad points. Bad points or sometimes called Loan Level Pricing Adjustments (LLPAs) are Points a borrower has to pay in the form of a penalty such as:
Bad points can also be found on Government loans like FHA, VA, & USDA. Borrowers are not getting anything in return for this additional money they have to pay. Bad points are a penalty that is imposed on the borrower because they or the property they are purchasing present a high risk.
Points can be good such as when a borrower pay "Discount Points" to lower his/her interest rate. These are "Good Points" because they lower the borrowers interest rate and it's discretionary (not penalty). For example, a lender might offer a 30-Year Fixed of $165,000 at 6% with 0 points. The monthly mortgage principal and interest payment would be $989. If you pay 2 points at closing or $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. However, it would take 64 months to earn back the $3,300 spent upfront on discount points. If you are planning to stay put for at least 5.5 years - then you save money by paying the points. Furthermore, this kind of point is tax deductible.
Good points can be received in the form of a credit. For example, a borrower can choose to receive a higher interest rate in lieu of lender credit towards closing costs. When is it worth to buy point? Generally speaking the longer you plan on staying put, the more likely your interest savings will be greater over the life of the loan. It's important to consider what is your break-even point - that is how long it'll take for the savings you receive from lower monthly payment to equal the amount you paid in points. Buying points is not advisable if your down payment is less than 20% because of Private Mortgage Insurance. Buying points may or may not be a great way to reduce housing costs. If you are planning to stay put for a while and if your down payment is at least 20% or when you are refinancing - in general discount points are good for you.