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5 Myths About Mortgage Points
Mortgage points are one of the most misunderstood concepts in
the mortgage world. On the surface, points are scary, and many
consumers equate points with mortgage scams and unnecessary junk
fees. However, nothing could be further from the truth.
If utilized correctly, points can be used to save you thousands
of dollars through properly structuring your mortgage. So, first
of all, what are points?
One point is equivalent to 1% of the loan amount. So, if you are
obtaining a $300,000 mortgage, one point equals $3000. Points
come in two categories, origination and discount points.
Although both origination and discount points are technically
the same thing, origination points are typically a fee that a
mortgage company charges to do your loan where as discount
points are points used to discount the mortgage or lower your
rate.
The 5 Myths:
So now that you understand the basics of what mortgage points
are, here are the 5 most common myths about mortgage points.
1. Points are a fee that goes to the lender. Technically,
this is correct. Points do go to the broker, however, an honest
broker will help you obtain a lower interest rate if you choose
to pay points.
2. Points must be charged on every transaction. Not true.
Brokers get paid two ways- through points and/or through "yield
spread premium" or a percentage paid to them directly from the
lender. If the broker charges points, the yield spread premium
will be zero or negative, and if the broker does not charge
points, he or she will make a percentage from the lender for
their services. Here is an example:
"No Points" Loan Program: 30 year fixed Loan Amount:
$200,000 Rate: 6.375% Points: 0 Cost of points: $0 Monthly
payment: $1247.74
"One Point" Loan Program: 30 year fixed Loan Amount:
$200,000 Rate: 6.0% Points: 1 Cost of points: $2000 Monthly
Payment: $1199.10
Points should always be your choice. In this scenario, you would
save $48.64 per month in the form of a lower payment by paying
an up front point cost of $2000. Carefully consider whether you
will be in the home long enough to recover the cost of the
points before making this decision. 3. Points are tax
deductible. This is partially true. When you purchase a
home, points are tax deductible in their entirety in the year
you purchase the home. In a refinance
transaction, you must
"amortize" the cost of the points over the term of the loan. In
other words, if you have a 30 year loan, in the case of a
refinance, you can only write off 1/30th of the cost of the
points each year for 30 years.
4. Points are paid up front. Many consumer mistakenly
think that mortgage points must be paid out of pocket before
their transaction closes. This is not true. Points are charged
at closing as part of the settlement charges.
5. Points can be used to buy down the rate as low as you want
to go. Points are used to obtain a lower interest rate,
however, some clients have asked me if they can pay, for
example, 5 points to lower their rate to an extremely low rate.
Unfortunately, this cannot be accomplished for two reasons.
First of all, predatory lending laws prohibit a broker's total
fees to exceed a certain percentage of the loan amount. Second,
there is always a threshold with every loan program where the
lender makes it unattractive to continue to buy down the rate.
In other words, perhaps you can "buy down" the rate .375% for
each of the first two points. The lender will likely make it
unattractive to use additional points, only allowing you to
better your rate by .125% for each additional point beyond 2
points. This is because there is an ebb and flow of money in the
economy, and mortgage paper at an unusually low rate is not as
hot of a commodity for lenders to have in their portfolio.
I hope that you now feel more comfortable with the concept of
mortgage points. It is critical that you find an honest mortgage
broker who is looking out for your best interests and can give
you an analysis of the long term effects of different loan
structures based on your unique situation. With hundreds of loan
programs available in the marketplace, it is only through
careful consideration of your needs and long term financial
goals that the right decision can be made.
About the author:
RJ Baxter has been a mortgage consultant for four years. RJ
utilizes his teaching background through educating consumers and
advocating ethical business practices in the mortgage industry.
RJ has received several awards for excellence and loan volume
and has consistently ranked in the top ten among over 400 loan
consultants at PrimeLending. To access more of RJ's articles or
read more about RJ or PrimeLending, please visit
www.rjbaxter.com.
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