What are Mortgage Points?

When people want to find out how much their mortgages cost, lenders often give them quotes that include both loan rates and points.

What exactly is a point?

A point is a fee equal to 1 percent of the loan amount. A 30-year, $150,000 mortgage might have a rate of 7 percent but come with a charge of 1 point, or $1,500.A lender can charge 1, 2 or more points. There are two kinds of points -- discount points and origination 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 zero to 3 or 4 points, depending on how much they want to lower their rates. This kind of point is tax-deductible.

Origination fee: This is charged by the lender to cover the costs of making the loan. The origination fee is 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 not deductible.
How do you decide whether to pay points, and how many? That depends on a number of factors, such as how much money you have available to put down at closing and how long you plan on staying in your house.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 percent 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 can bring the interest rate down to 5.5 percent, 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 five-and-a-half years, you save money by paying the points.

VA Closing Costs

The veteran can pay a maximum of all reasonable and customary amounts for any and all of the "Itemized Fees and Charges" designated by VA as defined below plus a 1% flat charge by the lender plus reasonable discount points. Some special provisions apply to construction, alteration, improvement and repair loans.

HOW TO HAVE MINIMAL TO NO CLOSING COSTS

Please note that often times veterans believe that closing costs are covered by a VA mortgage. While that is not technically true, the same effect can be reached through careful structuring of your real estate contract. The loan amount will be the purchase price or appraised value, whichever is less (plus the VA Funding Fee). So if you want your closing costs covered by the loan, you need to increase the price and have a stipulation with the seller will pay the closings costs and pre-paid expenses equal to the amount by which you have increased the price. As long as the home appraises for the increased price, you will have the closing costs paid as part of the deal. Closing costs and pre-paid expenses can vary widely with 3% - 5% as the range for most places. If you want a more specific number in this regard after you have started looking for properties, we can provide you with a Good Faith Estimate for a particular property that you have an interest.

ITEMIZED FEES AND CHARGES

The VA defines allowable fees and charges that the veteran borrower can pay or closing costs that may be charged to the borrower. These costs are determined as reasonable and customary by each local VA office. All other costs in the transaction are considered non-allowable and generally paid by the seller when purchasing a new home or by the lender when refinancing your current VA mortgage. Itemized fees and charges are as follows:

APPRAISAL AND COMPLIANCE INSPECTIONS

The veteran can pay the fee of a VA Appraiser and VA compliance inspectors. The veteran can also pay for a second appraisal if they are requesting a reconsideration of value. The veteran cannot pay for a second appraisal if the lender or seller is requesting a reconsideration of value or if parties other than the veteran or lender request the appraisal.

RECORDING FEES

The veteran can pay for recording fees and recording taxes or other charges incident to recordation.

CREDIT REPORT

The veteran can pay for the credit report obtained by the lender.

PREPAID ITEMS

The veteran can pay that portion of taxes, assessments, and similar items for the current year chargeable to the borrower and the initial deposit for the tax and insurance account.

HAZARD INSURANCE

The veteran can pay for the hazard insurance premium. This includes flood insurance, if required.

FLOOD ZONE DETERMINATION

The veteran can pay the actual amount charged for a determination of whether a property is in a special flood hazard area, if made by a third party who guarantees the accuracy of the determination.

SURVEY

The veteran can pay a charge for a survey, if required by the lender.

TITLE EXAMINATION AND TITLE INSURANCE

The veteran may pay a fee for title examination and title insurance, if any. If the lender decides that an environmental protection lien endorsement to a title policy is needed, the cost of the endorsement may be charged to the veteran.

SPECIAL MAILING FEES FOR REFINANCING LOANS

For refinancing loans only, the veteran can pay charges for Express Mail or a similar service when the saved per diem interest cost to the veteran will exceed the cost of the special handling.

VA FUNDING FEE

Unless exempt from the fee (10% minimum disability from the VA), each veteran must pay a funding fee to VA.

OTHER FEES AUTHORIZED BY THE VA

Additional fees attributable to local variances may be charged to the veteran only if specifically authorized by VA. The lender may request VA to approve such a fee if it is, (a) normally paid by the borrower in a particular jurisdiction, and (b)considered reasonable and customary in the jurisdiction. The following list provides examples of items that CANNOT be charged to the veteran as "itemized fees and charges." Instead, the lender must cover any cost of these items out of its flat 1% fee.


Loan closing or settlement fees, document preparation fees, preparing loan papers or conveyance fees, attorneys services other than for title work, photographs, interest rate lock - in fees, postage and other mailing charges, stationery, telephone calls and other overhead, amortization schedules, pass books, and membership or entrance fees, escrow fees or charges, notary fees, preparation and assignment of mortgage to other secondary market purchasers, trustee's fees or charges, loan application or processing fees, fees for preparation of truth-in-lending disclosure statement, fees charges by loan brokers, finders or other third parties, and tax service fees.


When reviewing allowable borrower fees and charges, many of the items can be paid for by the seller of the home and can be negotiable when presenting an offer on a home to the seller. Please consult with your Real Estate Professional handling the transaction.