Discount points , also called mortgage points or just points , is a form of prepaid interest available in the United States when setting up a mortgage. One point equals one percent of the loan amount. By charging the borrower's points, the lender effectively raises the loan yield above the stated interest rate. The borrower may offer to pay lender points as a method to reduce lending rates, thus earning lower monthly payments in return for these up-front payments. For each point purchased, the loan rate is usually reduced from 1/8% (0.125%) to 1/4% (0.25%).
Selling property or refinancing before this breakeven point will result in a net financial loss for the buyer while maintaining a loan longer than this breakeven point will result in net financial savings for the buyer. The longer you keep the property financed by a loan with the points purchased, the more money spent on that point will be paid off. Thus, if the goal is to buy and sell property or refinance quickly, paying the actual points will end up costing more than just paying a loan at a higher interest rate.
Points can also be purchased to reduce monthly payments for the purpose of qualifying for a loan. Qualifying loans based on monthly income versus monthly loan payments can sometimes only be achieved by reducing monthly payments through the purchase of points to buy down interest rates, thus reducing monthly loan payments.
Discount points may differ from origination fees, credit setting fees or brokerage fees. Discount points are always used to lower interest rates, while origination fees are sometimes a charge that lenders incurred for a loan or sometimes just another name to buy down the interest rate. The origination fees and discount points are both items listed under the borrowing costs of the HUD-1 Settlement Statement.
The difference in savings over the life of the loan can make the point of payment favorable to the borrower. If you intend to stay in your home for a long period of time, it may be worthwhile paying additional points to get a lower interest rate. Any significant changes in costs must be re-expressed in the final good faith estimate (GFE).
Also directly related to the points is the concept of 'no closing cost of the loan', in which the consumer receives a higher interest rate in exchange for the lender paying the closing cost of the loan in the future. In some cases, the buyer can negotiate with the seller to have them pay the seller points that can pay mortgage points.
Video Discount points
References
Maps Discount points
External links
- irs.gov/publications/p936 - The IRS 936 form defines one point for the purpose of reducing mortgage interest for US income tax
Source of the article : Wikipedia
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