What are points?

August 27, 2009 by Heidi Franklin  

    

The term “points” may come up during a discussion of real estate financing and can be a very important consideration when choosing a loan. Points are fees paid at closing, with each point equal to one percent of the loan amount. For example, on a $120,000 mortgage, one point is $1,200.

There are two different types of points that may be associated with your loan.

Discount Points
Discount points can actualy be considered as “prepaid interest” on your loan, so they may be tax deductible and reduce the amount of interest you will haveto pay later on. Paying discount points may make you, as a borrower, look more attractive to the lender. Check with your tax professional about the potential tax deductions that this and other closing and moving expenses can provide you when you buy a home.

Origination Points
Origination Points are esentially lender fees. If you have good credit, you probably won’t pay origination points. However, if your credit is less then steller, you may have to pay points in order to provide the lender with additional”insurance” for the credit risk taken by loaning you money.The point may be called a loan origination fee, commitment fee, warehousing fee, or funding fee.

Points are not set by government regulation, but by each lender individually. I t is important to discuss points with your lending professional so that you understand what you are paying and why.