When it comes to borrowing money for a home purchase, there will be a number of different costs involved. In addition to just the interest rate, it’s likely that you’ve heard lenders make reference to “points.” It is important to have a good understanding of how these can factor into the cost of your overall purchase, because in many cases, they can actually be the highest charge on your closing statement.
There are two different types of points. These include loan origination points and discount points. First, lenders will often charge origination points as a fee for “processing” your loan. This can include verifying the loan documents, evaluating your application paperwork, and ensuring that the loan gets processed. The lender will determine how much to charge you by going over your credit, your mortgage application, the amount of your loan, and other key factors.
One point is equal to 1% of the amount of money you are borrowing. So, if you are borrowing $200,000 and the lender decides to charge you 1 point, then you will be charged $2,000 ($200,000 X 1% = $2,000).
Discount points, on the other hand, are not related to your loan application process. Rather, when a person pays discount points, they are trying to get a lower interest rate on their loan. In this case, if you were to pay a discount point up front on a fixed rate mortgage, for example, you may be able to reduce the interest rate by a quarter of a percent.
This can, in turn, have the effect of reducing the amount that you pay over time by a substantial amount. In addition, whereas loan origination points are not tax deductible, discount points are.
When you’re seeking out the best home mortgage, remember that the interest rate on the loan may not always be the only factor to look for in terms of what will make it the best option for you. Give us a call for some additional home and mortgage hunting tips.