If you’re entering into a contract on a home you may be asked or have to pay “points”. Below is an explanation of what points are, as always we welcome your comments and questions!
What is a Point?
A point is equal to 1% of the new loan amount.
Why do Lenders Charge Points?
Whenever government regulation, state usury laws and/or competitive practices prohibit the lender from charging a rate of interest which would make the real estate loan competitive with other fields of investments, the lender can bring the real estate loan up to those other investments.
Are Points Called Different Names?
Yes. Loan Origination Fee, Commitment Fee, Discount Fee, Warehousing Fee. Funding Fee are some of the more common names used.
Who Pays the Points?’
FHA: Buyer is usually charged with the loan Origination Fee. The Discount Fee can be paid by buyer or seller.
VA: Buyer is usually charged with eh Loan Origination Fee & Funding Fee. Discount Fee must be paid by seller.
Conventional: Points can be paid by the buyer, seller, or split between the two. This will be stated on the contract of sale!
City/County/State Government Sponsored loans: as published by them.
Do the Number of Points Charged Fluctuate?
Yes. If rates on mortgage loans are lower than other investments,( such as stocks, bonds, etc.) then funds will be drawn away from the mortgage market. Also, when there is heavy demand upon the money market because of business needs, military requirements or other government borrowing, the result is that money for home mortgages becomes scarce and more expensive. When this occurs, more points can be charged. Points balance the market. Points are not set by government regulation but by each lender individually.
Is FHA or VA Financing Unfair to Sellers?
No. Homes can sell faster because more buyers can qualify with the lower down payment requirement, lower interest rate-long term loans with lowest monthly payments. Sellers receive all cash for their equity to reinvest in a new home or other investment. The purpose of these loans is to provide purchasers the opportunity to buy homes with minimal cash investment thus providing a bigger market for sellers.
Are Points Deductible for Income Tax Purposes?
Points on a home mortgage are deductible currently if points are generally charged in the geographical area where the loan is made and to the extent of the number of points generally charged in that area for a home loan. If you are in doubt about points being deductible, you should contact your accountant or the person who prepares your tax returns.
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