Other expenses you could face in obtaining a mortgage loan are points and origination fee,
which are charged by the mortgage lender. These fees are usually paid at closing or
settlement, thereby adding to your list of closing costs.
A lender can charge one, two or more points. There are two kinds of points:
- Discount points:: These change with the interest rate since points are
actually prepaid interest on the mortgage loan. Each point is one hundredth of the loan
amount. For instance, on a $100,000 mortgage, one point is $1,000. Generally, the more
points you pay, the lower the interest rate on the loan and, vice versa, fewer points
generally mean higher interest rates. If a lender charges no points, you may end up paying a
higher rate or larger fees, or some combination of the two.
- Origination fee: This is charged by the lender either to cover costs, or to
boost profits. A loan origination fee covers the lender's cost of preparing all the
documents associated with your mortgage.
Tip
Keep in mind you can deduct the cost of points on your federal income tax (but not other
fees involved in closing costs). Sometimes you negotiate to get the seller to pay the
points, rather than lower the price of the house. In that case, you can't deduct the points,
either.
Which is Better, Points or No Points?
When you go shopping for a loan, always ask for a quote with and without points. Points as
prepaid interest help reduce the interest rate. For example, a lender might offer you a
30-year fixed mortgage of $100,000 at 7.5 percent interest with no points. The monthly
mortgage principal and interest payment would be $699. But if you pay two points at closing
(that's $2,000) you can bring the interest rate down to 7 percent, with a monthly payment of
$665. The savings difference would be $34 per month.
Calculator
To determine if it would be worth the savings to pay points at closing, check out the
bankrate.com points
calculator.
Tip
The best option depends on your individual needs, but, if you need to reduce closing costs,
choose the zero point option on your loan program.