Loan Points Explained For Home Buyers
What is a point?
One point is equal to 1% of the Fresh loan amount.
Why do lenders charge points?
Whenever government regulation, state usury laws and/or competitive practices prohibit the lender from charging a rate of interest which would make the real estate loan competitive with other fields of instruments, the lender must seek some method of enhancing the yield for the investors. By charging “Points,” the lender can bring the real estate loan up to those investments.
Are points called by different names?
Yes. Loan Origination Fee, Commitment Fee, Discount Fee, Warehousing Fee, Funding Fee, etc.
Who must pay the points?
FHFHA Loans: Buyer is usually charged with the Loan Origination Fee. The Discount Fee can be paid by the Buyer and Seller.
VA Loans: The Buyer is usually charged with the Loan Origination Fee and the Funding Fee. Discount Fee must by paid by the Seller.
Conventional Loans: Points can be paid by the Buyer, the Seller, or split inbetween the two.
City/County/State Government Sponsored Loans: As published by them.
Does the number of charged points fluctuate?
Yes. If rates on mortgage loans are lower than other investments (such as stocks, bonds, etc.) then funds will be drawn away from the mortgage market. Also, when there is a strenuous request upon the money market because of business needs., military requirements or other government borrowing, the result is that money for home mortgages becomes scarce and more expensive and more points can be charged. Points balance the market. Points are not set by government regulation but by each lender individually.
On VA loans, is there a way to lock in the number of points?
Not without jeopardizing the sale. Even when a lender stipulates in writing the number of points to be charged, that assure states “If the interest rate is not switched by the government.” Points charged on a FHA or conventional loan are usually not switched from commitment time to settlement.
Is FHA or VA financing unfair to sellers?
No. Homes can sell quicker because more buyers can qualify with the lower down payment requirement, lower interest rate-long term loans with the lowest monthly payments. Sellers receive all cash for their equity to reinvest in a fresh home or fresh investment. The purpose of these loans is to provide purchasers the chance to buy homes with minimal cash investment, thus providing a fatter market for sellers.
Are points deductible for income tax purposes?
Points on a home mortgage (for the purchase or improvement of, and secured by, the taxpayer’s principal residence) are deductible. Presently if points are generally charged in the geographical are where the loan is made and to the extent of the number of points generally charged in that area for a home loan. If you are in doubt about points being deductible you should contact your tax comeback preparer.