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Should I pay points?

October 25th, 2017 10:18 PM by Sam Kader

When people want to find out how much their mortgage cost, we are required to provide quotes that include loan rates and points. What exactly is a point? A point is a fee equal to 1 percent of the loan amount. For example, a 30-year fixed loan at $150,000 with a rate of 3.5% and a charge of 1% or $1,500. 

Do I have to pay points? Not everyone has to pay "Points" but depending on the loan program, "Points" maybe an automatic charge. For example, Fannie Mae will charge "Points" on all Fannie Mae backed loans unless your down payment is 40% or more no matter how good your FICO score are. Points can be good points and bad points. Bad points are Points a borrower has to pay in the form of a penalty such as:

  1. Low Credit Score
  2. High Loan-To-Value
  3. Type of Property
  4. Investment Loans

Bad points can also be found on Government loans like FHA, VA, & USDA. Borrowers are not getting anything in return for this additional money they have to pay. Bad points are a penalty that is imposed on the borrower because they or the property they are purchasing present a high risk. 

Points can be good such as when a borrower pay "Discount Points" to lower his/her interest rate. These are "Good Points" because they lower the borrowers interest rate and it's discretionary (not penalty).  For example, a lender might offer a 30-Year Fixed of $165,000 at 6% with 0 points. The monthly mortgage principal and interest payment would be $989. If you pay 2 points at closing or $3,300 - you might be able to drop the interest rate down to 5.5% with a monthly payment of $937. The savings difference would be $52 per month. However, it would take 64 months to earn back the $3,300 spent upfront on discount points. If you are planning to stay put for at least 5.5 years - then you save money by paying the points. Furthermore, this kind of point is tax deductible.

Good points can be received in the form of a credit. For example, a borrower can choose to receive a higher interest rate in lieu of lender credit towards closing costs.


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