5 Myths About Mortgage Points

Mortgage points are one of the most misunderstood concepts in the mortgage globe. On the surface, points are scary, and countless consumers equate points with mortgage scams and unnecessary junk fees. But, nothing could be further from the truth.

If utilized appropriately, points can be utilised to save you thousands of dollars through properly structuring your mortgage. So, to begin with of all, what are points?

1 point is equivalent to 1% of the loan quantity. So, if you are acquiring a $300,000 mortgage, one point equals $3000. Points come in two categories, origination and discount points. Although each origination and discount points are technically the same thing, origination points are normally a fee that a mortgage business charges to do your loan exactly where as discount points are points utilised to discount the mortgage or lower your rate.

The 5 Myths:

So now that you recognize the fundamentals of what mortgage points are, here are the 5 most widespread myths about mortgage points.

1. Points are a fee that goes to the lender. Technically, this is appropriate. Points do go to the broker, nevertheless, an honest broker will aid you get a lower interest rate if you select to spend points.

2. Points need to be charged on just about every transaction. Not correct. Brokers get paid two methods- through points and/or through "yield spread premium" or a percentage paid to them directly from the lender. If the broker charges points, the yield spread premium will be zero or negative, and if the broker does not charge points, he or she will make a percentage from the lender for their services. Here is an example:

"No Points" Loan

Program: 30 year fixed

Loan Amount: $200,000

Rate: 6.375%

Points:

Expense of points: $

Monthly payment: $1247.74

"1 Point" Loan

Program: 30 year fixed

Loan Amount: $200,000

Rate: 6.%

Points: 1

Expense of points: $2000

Monthly Payment: $1199.ten

Points should really consistently be your choice. In this scenario, you would save $48.64 per month in the form of a lower payment by paying an up front point expense of $2000. Carefully consider no matter if you will be in the household lengthy adequate to recover the expense of the points ahead of making this decision.

3. Points are tax deductible. This is partially correct. When you buy a household, points are tax deductible in their entirety in the year you buy the household. In a refinance transaction, you need to "amortize" the expense of the points over the term of the loan. In other words, if you have a 30 year loan, in the case of a refinance, you can only write off 1/30th of the expense of the points every single year for 30 years.

4. Points are paid up front. Most consumer mistakenly believe that mortgage points need to be paid out of pocket ahead of their transaction closes. This is not correct. Points are charged at closing as component of the settlement charges.

5. Points can be utilised to obtain down the rate as low as you want to go. Points are utilised to get a lower interest rate, nevertheless, some customers have asked me if they can spend, for example, 5 points to lower their rate to an exceptionally low rate. However, this cannot be accomplished for two causes.

1st of all, predatory lending laws prohibit a broker's total fees to exceed a specific percentage of the loan quantity. Second, there is consistently a threshold with just about every loan program exactly where the lender makes it unattractive to continue to obtain down the rate. In other words, maybe you can "obtain down" the rate .375% for every single of the to begin with two points. The lender will most likely make it unattractive to use extra points, only permitting you to far better your rate by .125% for every single extra point beyond 2 points. This is for the reason that there is an ebb and flow of dollars in the economy, and mortgage paper at an unusually low rate is not as hot of a commodity for lenders to have in their portfolio.

I hope that you now really feel a great deal more comfortable with the idea of mortgage points. It is crucial that you discover an honest mortgage broker who is seeking out for your top interests and can give you an analysis of the lengthy term effects of various loan structures based on your exceptional situation. With hundreds of loan programs available in the marketplace, it is only through cautious consideration of your requirements and lengthy term economic goals that the suitable decision can be produced.