What are points?
A. Points can be purchased to “buy-down” a par rate. For example, if the current rate offered, with no points is 7.0%, and you wanted a 6.5% rate you could pay your lender approximately 2 points (= to 2% of your loan amount)and your note rate would be 6.5%. Therefore, you simply pay money (points) up front to get a lower rate, and save money in the long term (usually over 4 years).
In real estate, the term point refers to 1% of the total mortgage loan amount. Buyers often pay lenders this supplemental fee, calculated in points, to get a better interest rate on a particular mortgage. For instance, a lender may offer you a choice of two 30-year mortgages: the first at 10% with no points, and the second at 9% with an additional three points. If the loan is for $100,000, those three points will cost you an extra $3,000 up front – but youll get a payback of significantly lower monthly payments ($840.85 vs. $877.57) for the lifetime of the loan. Many lenders will advise you to pay the points for the better rate if you can afford it, especially if you plan on keeping the home for more than a few years. Like interest, the money you pay for points may be tax-deductible, and the investment may pay for itself through savings generated by lower monthly payments. We suggest you call your tax preparer.
In the special vocabulary of mortgage lending, “points” are a type of fee that lenders charge (the full term to describe this fee is “discount points”). Simply put, a point is a unit of measure that means 1% of the loan amount. So, if you take out a $100,000 loan, one point equals $1,000. Discount points represent additional money you can pay at closing to the lender to get a lower interest rate on your loan. Usually, for each point on a 30-year loan, your interest rate is reduced by about 1/8th – 1/4th (or .125 & .250 respectively) of a percentage point. TIP: Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points. We will be happy to discuss the pros & cons with you to help you make your decision.
A point is 1% of the loan amount. For example, 2 points on a $300,000 house, equates to 2% of $300,000, or $6,000. The number of points charged for a mortgage varies, depending on the circumstances. Paying higher points may result in a lower interest rate, costing you less over the life of your loan. You will pay the point fees at closing, and may be able to deduct the point amount as interest on your income tax return. (Consult a tax professional.
